Interactive Brokers customers who held long E-mini crude or ICE Europe WTI positions on April 20, 2020 took losses at prices their broker’s screens did not properly show. The NYMEX May WTI contract settled at negative $37.63 per barrel, and those cash-settled contracts took their settlement from it, according to the CFTC press release on the case that followed. The broker’s customer-facing platforms did not properly display negative prices. Commodity trading software gets tested on days like that.
What broke inside the broker’s systems
The CFTC order against Interactive Brokers LLC finds two faults. In the first, the market data system (Ticker Farm in the order) treated negative prices in the E-mini crude (QM) and ICE Europe WTI contracts as errors and rejected them. Screens did not display them, customers could not enter negative-priced limit orders, and after the price fell below zero customers could not enter orders to liquidate long positions. The credit system never received the negative prices either. It overstated the value of accounts with long positions, and it did not try to auto-liquidate positions in accounts that would have been in margin deficit if correctly marked to market.
The second fault sat in the margin engine, which capped the initial margin for a long WTI position at the lesser of the contract’s notional value and the house margin, which was $8,462.50 per contract that day. When the price collapsed, the notional value dropped under the house margin. Customers could then open more than three times as many contracts as the normal pre-trade margin would have allowed.
The CME Group had issued a series of advisory notices about possible negative prices, and the order cites three dated April 3, April 8 and April 15, 2020. Interactive Brokers had started testing its own coding changes. They were not live on the 20th.
Hundreds of accounts were affected. The firm estimated customer losses at more than $82.57 million and says it compensated 272 customers. In September 2021 the CFTC ordered a $1.75 million penalty for failing to diligently supervise customer accounts.
Two questions come out of it. How does a platform treat a price outside its usual range? Is margin checked before an order is accepted?
A registered futures broker answers to the CFTC
Interactive Brokers is a registered futures commission merchant. The CFTC says it holds registrants responsible for how their electronic systems handle customer accounts. The Commodity Exchange Act requires futures commission merchants to register, unless they qualify for an exemption such as handling only proprietary transactions. Before trading futures, options, forex or other derivatives, the CFTC tells traders to verify that the firm is properly registered, through the NFA BASIC database. A registered firm’s customers can seek help through the CFTC reparations program or NFA arbitration, and the agency adds that you are less likely to be protected if you deal with entities that are not registered.
Why CFD apps rarely fit a US account
Some apps sell commodity exposure as contracts for difference, which finder.com describes as agreements where the buyer never owns or trades the underlying asset. Finder.com says retail access to CFDs is restricted in the United States. Since the Dodd-Frank Act of 2010 brought them under federal oversight, they can be classified as swaps, and selling swaps to everyday investors is allowed only for trades on a registered US exchange. Almost every CFD trades over the counter.
If an app advertises commodity CFDs to American users, the first question is where the firm is registered. Traders outside the US should run the same check with their own regulator. If the position hedges cargo already on the water, there is a second job, checking where the shipment stands, and no futures screen does it.
What to test before funding commodity trading software
A demo account, where the broker offers one, shows how the platform handles orders and margin, though it will not reproduce a flaw that only appears in an extreme market. So ask support in writing what happens to quotes, orders and margin when a contract trades at zero or below, and note how precisely they answer.
Fees can wait. Per-contract commissions, data charges, deposit and withdrawal costs and any fee for an idle account all belong in the comparison, along with the range of commodities (metals through agricultural contracts) and the ways to fund the account.
Frequently asked questions
Can a US trader use an offshore commodity trading platform?
The CFTC says foreign entities that solicit you to trade are generally required to register with the CFTC, though some non-U.S. firms are exempt. It adds that you may have fewer protections with an unregistered offshore company, and that resolving a problem may require consulting foreign counsel.
A broker does not appear in NFA BASIC. Is that an automatic red flag?
Not always. The CFTC notes that some firms or individuals may be exempt from registration or not regulated by it, and that such persons sometimes appear in BASIC with the basis for the exemption. If the firm cannot be found, ask why. The agency advises extra caution in markets with many fraud complaints, which it lists as commodity pools, precious metals, binary options, forex and digital currencies.
Does a clean registration record mean the platform is safe?
No. The CFTC states that registration and a clean disciplinary record will not protect you from fraud. What it does say is that most scams involve unregistered entities, people and products, which makes the check a filter and not a guarantee.