It was clearly IB's fault because the software stopped working at -ve price. If there were a class action lawsuit, IB will likely lose.
Risk management can't protect against that -ve oil price episode. Even a small position can balloon to large losses if you buy at $0.20 and the price went down to -$37. Counter-trend trading is a legitimate strategy with edge. Many successful traders use counter-trend trading strategy. It's reasonable that some of these experienced counter-trend traders buy oil on that fateful day, and blow up their account. I expect many oil veteran traders to be completely surprised by negative oil prices too.
IB is 99% responsible for the guy's losses (the one who bought 212 cars at 0.01), WTI had already gone negative but their crappy platform was still displaying bid/ask at 0.00/0.01. This shouldnt have happened, the trades at 0.01 shouldnt have even gone thru, IB is not a bucket shop so who were these guys buying these 1 penny contracts from anyway? IB has insanely high margin requirements for everything because they dont have any confidence in their own risk management system, funny thing is those insanely high margins didnt stop them from losing money in the end. This will likely happen again at some pt, its just a very poorly run firm.
This is not a risk management issue, its a technology issue, IB was incapable of displaying negative prices.
If the trader had been "hedged" in a three part CL butterfly, or a four part CL condor, could he have mitigated (or avoided) total capital destruction? 77K is a lot of money for a retail trader to lose. Yeah, he might be relieved that he doesn't owe 9 million dollars, but 77K is still a tough punch to the gut. It will take time to save that much to trade again, if he decides to get back on that bucking horse.
I prefer to use the word reversal in this statement 'Counter-trend trading is a legitimate strategy with edge' . so Reversal is a legitimate strategy with edge. When Shah was buying the oil contract , he was obviously doing counter trend trading (aka catching falling knife or kamikazae trading). Few minutes after the knife has fallen on the floor / after his deadly kamikaze trading, there was reversal signal / pattern. And that was when he could have bought the oil contract. Obviously he couldn't because IB system / chart wouldn't show what was below the zero line. If Shah continues the way he is doing, he will be in very very deep trouble next time. Next time IB might not safe him.
two contracts going negative is enough to wipe him any ways 77k is not a lot or a little it depends on the person risk level and their income and wealth and belief in the profession of trading/investing in general there is no such thing as a lot or a little i know people worth million and the most their trading account has is 100k and i know others worth negative, loans, credit cards, etc etc and yet they got wurter million in their trading account