27 April, 2020 – Prime of Prime and Liquidity Provider, IS Prime has become the first Tier 1 Prime of Prime to provide a solution to combat the huge risk associated with the spot oil price potentially going negative again.
On Friday April 17th, for the first time in history, Oil prices fell below zero due to a combination of lack of demand and lack of storage capacity. This event led to significant losses by some of the largest retail brokers in the space due, in part, to their systems stopping clients out at 0 and hedging in the futures market at a negative rate.
Many brokers’ trading systems are unable to accept negative rates and, to combat this, IS Prime has rapidly developed two new proprietary products - the US Oil Index and the UK Oil Index. These products are rebased at $100, effectively meaning that should IS Prime’s proprietary spot price fall to, say $-5USD (negative $5), the pricing will reflect this at $95. According to the press release from the company, this has the effect of preventing stop outs whilst still reflecting the market moves and the full underlying volatility of Oil.
IS Prime can move positions in its existing US and UK spot indices into the new products for current clients, easing the transition for existing clients.
Jonathan Brewer, Managing Partner at IS Prime explained the move to introduce the new product:
“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.
Jonathan Brewer, Managing Partner, IS Prime
“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.”
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