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Tech-driven high frequency trading (HFT) firms earned lion’s share of profit from their crude oil bets on the Multi Commodity Exchange (MCX) on April 20, when oil prices turned negative.
More than 11,500 crude oil contracts were outstanding on April 20 when trading closed on MCX. The move by the exchange to set negative price of crude oil for these open positions led to a profit of ₹442 crore to those who held short positions, and loss to those who could not square up their longs. On that day, oil prices fell continuously till the close of trading hours. HFT firms are just directional traders, and hence most were on the right side of the trade that day, brokers said.
Largely, HFT algorithmic strategies do not square up positions on contract expiry day if the trade is in their favour and hold it till the closing bell. But on April 20, there was no time when the long unwinding could have happened, as the crude prices on MCX were down by more than 25 per cent at closing. The price closed at ₹965, a multi-decade low.
Major players
Shastra (Tower Research), Open Futures, Alphagrep, Quadeye, Rmoney, FinVasia, Graviton Research Capital, Gogia Capital, SMC, and Globle among others are the large HFT traders on MCX. These firms have co-located their servers close to the MCX building in Andheri, Mumbai to achieve speed of order execution. The volume break-up of each of these HFT players are not available in the public domain. But put together, they are responsible for 60-80 per cent churn in various segments MCX, large brokers involved in trading in the segment said. A majority of trading volumes both in equity and commodity exchanges on India are HFT-driven.
“Leased line providers have opened data centres in areas surrounding MCX building at Andheri. Rack space has been purchased by brokers who are mainly ensconced in Delhi, Mumbai and Bengaluru. Many of these firms also have HFT trading desks in the US for arbitrage,” a technology employee of a leading exchange said.
Even though the MCX trading platform does not allow negative pricing, the exchange settled its crude oil contracts in the negative. This was due to crude oil closing at negative $37 on NYMEX, the exchange from which MCX takes its settlement price. MCX set its price at (negativ)e ₹2,884. The profits and losses on April 20 were technically due to MCX settlement method, experts said.
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