Less-than-zero oil crashes systems

An electronic board at Yonhap Infomax in central Seoul on Tuesday shows the price of crude oil plummeting. It was the first time an oil future contract went below zero. [YONHAP]

As the price of oil plunged below zero for the first time ever, brokerage house systems crashed because they were not built to handle negative prices for oil trades.

Investors were unable to even input the minus sign.

On Monday, the futures contract for West Texas Intermediate for May delivery plunged to a historic low of negative $37.63 ahead of the expiry of the contract.

With the oil glut hitting extreme levels because of the Covid-19 outbreak and the lack of travel and economic activity, oil storage is becoming impossible to find and holders of the contracts are dumping them - even paying so that they don’t have to take delivery of the crude.

Kiwoom Securities, a local brokerage focused on retail investors, said Tuesday its home trading system crashed between 3:09 a.m. and 3:30 a.m. because the system was not designed for prices below zero.

“Around 3:10, the E-mini crude futures price went below zero, and it is true that the system couldn’t recognize the minus number, so trading was suspended for about 20 minutes,” said Nam Seung-kyu from Kiwoom Securities’ communications team.

According to Kiwoom, the E-mini crude futures for May delivery, which is traded on New York Mercantile Exchange, was the only contract affected because of the trading hours for the contract.

“At around 3 a.m., I purchased E-mini crude futures for May delivery for high frequency trading, and after seeing it fall below zero, I tried to sell it off, but the system produced errors,” according to one of the complaints posted on the Kiwoom Securities online bulletin board Tuesday. “I couldn’t even type in minus into the system, so I couldn’t submit my order to sell it. I just had to sit and watch my profit going to negative. I believe Kiwoom should fully take responsibility.”

Kiwoom Securities said it is currently evaluating the scale of the damage and said it would “compensate in line with the company’s internal regulation to those who experienced losses due to the futures price that went to negative territory.”

The systems of Korea Investment & Securities and Yuanta Investment generate similar errors between 3 a.m. and 5 a.m. on Tuesday, and the brokerages are currently evaluating the losses.

Other brokerages, including Mirae Asset Daewoo and Daishin Securities, required customers to cash out of contracts or roll them over before midnight on Monday due to the possible volatility.

The Financial Supervisory Service said Tuesday it is reviewing the case at Kiwoom Securities and is checking whether other brokerages had similar issues.

“Investors should be cautious in investing in oil futures because even if Covid-19 subsides and demand for oil rises, production is, at the same time, at a record-high level, so it will take longer than expected for the oil price to rebound to normal levels,” said Kim So-hyun, analyst at Daishin Securities.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]