Amid historical oil price movements in the US market, Prime of Prime liquidity provider IS Prime announced this Monday that it has launched a solution that aims to combat the risks of the spot oil price potentially going negative again.
Specifically, IS Prime has developed two new proprietary products the US Oil Index and the UK Oil Index, which are aimed to combat the inability of brokers’ trading systems to accept negative rates.
Lockdown measures in response to COVID-19 have stopped billions of people from travelling which has significantly reduced the demand for oil, creating an oversupply for the commodity, which saw the price for WTI futures (West Texas Intermediate) for May fall drastically.
This event has led to significant losses for some of the largest retail brokers in the space. As highlighted by IS Prime in its statement, this was partially due to the fact that brokers’ systems stopped clients out at 0 and hedging in the futures market at a negative rate.
In particular, the US Oil Index and the UK Oil Index are rebased at $100. This means, should IS Prime’s proprietary spot price fall into negative territory, say $-5USD, the pricing will reflect this at $95.
IS Prime products to prevent stop outs
According to the statement released by the company, this feature will prevent stop outs whilst still showcasing the market moves and the full underlying volatility of Oil. As part of the transition process, for clients of IS Prime, the liquidity provider can move positions in its existing US and UK spot indices into the new products.
Commenting on the new products, Jonathan Brewer, Managing Partner at IS Prime said in the statement: “Many brokers have not recognised the truly catastrophic effect that negative rates can have on them. Individual retail brokers could face losses in the hundreds of millions of dollars due to stop outs at 0 and subsequent hedges at a negative rate.
“Our new fully proprietary Oil Index allows brokers to offer pricing and execution in these products to their clients even if the market drops below 0 again, which is highly probable coming into the next futures expiry.
“There will be other providers attempting to develop a solution through third party pricing but, as the market has come to expect from IS Prime, our products are carefully thought out and well-engineered. We are very pleased to be able to offer continuity of service to new and existing clients and to have delivered a new product in a very short timeframe when it is most needed.”