Armageddon in the oil market reportedly cost Bank of China customers $85 million

A painful lesson for retail investors


The outrage against the Bank of China has been a trending topic on social media this week, as thousands of retail investors saw their life savings vanquished in betting on the oil market via the bank’s wealth management products.

These things were marketed with names like “crude oil treasure” before the Bank of China joined other major institutions to suspend trading and sales of such products after the wipeout in the market saw oil prices turn negative in the May futures contract.
The investors were betting on an increase in prices but were caught out as the front month contract at the time crashed hard and hit negative for the first time ever.
Bloomberg is reporting that the Bank of China settled the May futures contract for the product at the Monday close of around -$37.63 per barrel, resulting in $28 million of initial losses and a further $57 million as prices plunged into negative territory.
It is such a shame that many of the investors involved in this incident will see everything taken away from them in just one day. But it is a reminder to those new in the market that there is a difference between investing/trading and gambling.
If you do not understand the rules and when you are faced with a heap of uncertainty, it creates fear. And fear is the number one enemy of every investor/trader.
When we are fearful, we make bad decisions that we otherwise would not normally make. In this example, perhaps the Bank of China is also partly at fault but when you do not understand the magnitude of the risks involved, you are gambling with your luck.
In this case, these people were caught on the wrong side of the trade as the market did not agree with their view. And by not understanding the risks associated with the product, they were not able to define and limit their risk levels accordingly.
It is an extremely painful lesson for those involved but it is one that we can learn from and apply to other areas in our trading.