Indeed, being short on crude when it went negative isn’t wrong in any way. Also, a group of individual traders being able to outsmart big banks/funds and earning profit at the end of the day is admirable.
The problem seems to have been related to the trading that happened near the last half-hour of the close (2:30PM) on April 20, 2020. As per the Bloomberg article shared above, Vega Capital traders were the biggest sellers of the futures/spread contracts during that time period. The final settlement price for the WTI crude oil contract is calculated by taking a weighted average of trades occurring from 2:28 PM to 2:30 PM.
In the last half-hour the nine Vega Capital traders were, as a group, by far the biggest sellers of both WTI futures and spreads, according to trading data described to Businessweek—a remarkable situation in a market normally dominated by the likes of BP, Glencore, and JPMorgan Chase.
The likely reason they were selling these contracts is because they had bought WTI contracts in the TAS (Trade At Settlement) market earlier and were probably trying to net-off their positions so that actual physical delivery obligation for oil doesn’t arise -
As China’s Crude Oil Treasure fund and others sold WTI contracts in the TAS market on April 20, the Essex traders bought them, according to people familiar with their trading, committing to buy large quantities of oil at whatever the settlement price turned out to be.
Some people say that they were “banging/slamming/hammering the close”. CFTC had fined Optiver for doing that a few years back. But regulators will likely have to gather evidence for any wrongdoings before they bring any kind of charges against them (which normally takes many years, like in Navinder Singh Sarao’s case related to spoofing, it took around 5 years).
But from a different angle, it might appear a trade gone wrong for counterparties of Vega Capital’s trades. An unusually high number of TAS contracts were traded on April 20th, 2020 (as per an FT article, around 140,000. Comparatively, the highest TAS contracts traded on a single day in 2019 stood at around 30,000). Most believe the biggest hit was taken by Bank of China’s product called Yuan You Bao (meaning Crude Oil Treasure. It got completely wiped out and its investors owed money because the price went negative. Eventually, a court in China ordered that the bank had to return 20% of the initial investment of every investor and take the losses on their own books ). Likely when BoC’s client sold those TAS contracts (which Vega Capital bought) they had not imagined that price would go negative. In the end, Vega Capital profited from both sides of their trades. The TAS contract that they had bought earlier netted them a profit of $37.63 per barrel. For the sell-side of the trade, as they continued to sell WTI futures (mainly to net-off their position against the TAS buys) and the price kept going down, they profited from that as well.