IB Energy Futures New Policy

[VolSkewTrader]

Who knows if they are doing lognormal or normal distribution but thinking a market maker can or would want to change their code w/o little notice, ability to test or incentive isn't realistic.

CME gave them plenty of notice (1 week). No coding changes needed. All they need to do is switch their BS, Whaley, or Binomial theoretical models to Bachelier or Normal No Bounds and just mass quote strikes as usual.

These MMs are paid and/or rebated through the market-maker incentive program to make reasonably "tight" two-sided markets in all of the expirations they are assigned to. So basically it's their job to provide liquidity for the exchange, and they are rewarded handsomely for it.

 

[NotKenGriffin]

CME gave them plenty of notice (1 week).

They've actually had even longer than that. Here is an advisory notice from April 8th:
https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2020/04/Chadv20-152.pdf

More importantly, there have been negative prices in the energy commodity space before. Any large firm that trades physical should already have pricing models in place to handle it. I would assume these MMs would be in the same position.

 

[eastern_warrior]

They've actually had even longer than that. Here is an advisory notice from April 8th:
https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2020/04/Chadv20-152.pdf

More importantly, there have been negative prices in the energy commodity space before. Any large firm that trades physical should already have pricing models in place to handle it. I would assume these MMs would be in the same position.

I would guess market makers wouldn’t prioritize that given the volatility in the markets, suspected volumes on negative strikes, and the work from home orders. I’m not sure switching a model when strikes are already trading is ideal either. Of course it could be done but would you spend time on it given all the opportunities or issues elsewhere? You know the guys at Ronin weren’t !

 

[VolSkewTrader]

MM's are incredibly anal about their hedge ratios and greeks, so having the appropriate pricing model for their operation means everything. If you're going to trade these negative strikes you better know your risk.

The guys at Ronin simply had the wrong strategy (short vol) at the absolute worst time (when VIX was exploding from 20 to 80+) This short premium strategy that made millions for 10+ straight years, lost everything they made for the last decade and then some in just a matter of weeks or days. The people at Ronin who really got screwed were the other hundred or more traders Ronin backed who had millions of their own money in their respective trading accounts. All gone because of 1 or 2 rogue operations that took the whole firm down.