What is the role of speculators (short term)?
To mainstreet, speculating is "what wall street does" and "is abstract", sometimes "what banks do",
they have no idea what it is for, the image I guess is fast cars and stupid banker drinking champagne all the time?
The wolf of wall street. Wolf of wall street was a stock broker, but they're all just the same to people aren't they?
Plenty of people get involved in markets, but I want to focus on what I do which is speculating.
Risk taking. Predicting the future. This is what 99% of new fresh retail traders think of when they first get in.
I rarely see a definition of what trading is, and I even never or very rarely see it divided in different areas (as I said on the chart, arbitrage market making etc are different from speculating).
Today for the first time someone is going to explain exactly what it is and what its purpose is, market by market (but really I'm going to explain for forex & futures which are my area of expertise and just throw out guesses for the rest).
And yes, it does serve a purpose, at least in forex & futures it does.
* Futures (Metals Agriculture Energy)
Futures markets allow farmers, industrials, miners, businesses in general, to conduct business efficiently without having to worry about price fluctuations.
This has to be the easiest to understand, because physical goods are involved and real people that need to buy or sell these goods regardless of events they have no control on.
This, the futures exchange market, has existed for at least 10 millenia. 10000 years! Can you believe it?
In 1750 BC, trading was carried out at temples, so they even had a trading floor like the CME before computers.
medium.com/market-pr...trading-631e9ab64fed
(On the internet you can find the story of Thales - the mathematician & philosopher you probably heard about at school- that predicted the olive harvest would be exceptional and speculated on that, and made alot of money doing so. That was 26 centuries ago).
Futures have existed for as long as agriculture did. Our entire civilisation is based and relies on futures!
Some examples:
Grains (Corn Wheat Soybeans Rice).
So to sum up:
- On one side: Farmers & Food manufacturers/distributors looking for price stability so they may run their business smoothly. Get rid of the risk. Their job is producing or processing food.
- On the other side: Speculators eating up all of the risk, miam miam miam nom nom nom, dealing with market fluctuations and portfolio fluctuations. Their job is to take risk and anticipate future price movements.
One could almost say with certitude, there would be no civilisation without speculators fulfilling this role. Complete mayhem.
Industrial metals:
Another example with food:
From a company that sells advice to food industries and manufacturers:
Supermarkets that put small businesses out of business are now also at a risk of closing shop, as consumers want the cheapest goods they can get:
Concrete simple quick example of when unhedged costs can really destroy a company:
According to a SEC filing they have 30 billions of debt.
They are completely vulnerable to the weather and other random events.
2 catastrophies and bankrupcies in less than 20 years are you serious?
And consumers are paying for it? See why futures are useful now?
Ah, energy. No point repeating the basic principle, it's the same as for industrial metals & various agri goods. let's look at a few bankrupcies. The most famous one might be ENRON but that's not because of price fluctuation it's because they were crooks. By the way ENRON CEO created a crypto the day he got out of jail. What a guy XD He's instantly back to scamming.
Energy Future Holdings.
Calpine Corporation.
Were, and still are, the largest generator of electricity from natural gas and geothermal resources in the United States. This is the opposite of the previous one. The previous one lost money because prices went down.
That one went bankrupt because costs went up.
All they had to do was buy long futures...
Businesses that buy and sell energy fuel are part of the market, whether they like it or not.
NOT buying long contracts inderectly makes them speculate the price will go down, OR that it won't go so high it will cripple them. Basically makes them bagholders holding onto a loser.
The company received $2 billion in financing to allow it to keep its plants supplying customers.
From taxpayers I assume?
The great rektage of 2015.
This is not an officially adopted name, it's one I choose to describe this. It should become the official term.
What happened?
More than 330 North American energy companies went bankrupt. Estimate of the cumulative debt fluctuate between 100 billion and 500 billion.
www.houstonchronicle...merican-12831308.php
The WSJ keeps track of the listed companies bankrupcy filings since 2015, I am not sure they are all here but anyway it's still big:
graphics.wsj.com/oil...ankruptcies-tracker/
Coal.
Not sure how this works, but some companies producing coal went bankrupt when prices started to fall.
James River Coal is still running, Patriot Coal is defunct, and its retired workers lost their health benefits.
For the employees themselves there is not much they can do there.
Recently you have US farmers that not only lost china as a customer, had their crops destroyed by a recent heat wave, but also have to deal with lower prices, because of the trade war (since demand dropped).
www.cnbc.com/2019/08...de-war----china.html
Still, they are defending Trump, and he has an approval rating of near 80% with them.
I know that even small farmers, not just big companies, participate in the futures market, but I don't really know how many.
Anyone is allowed to.
If there is 1 thing farmers industrials and utility companies can learn from this, it's don't gamble man.
Leave the gambling to the professional gamblers.
According to the CME (if I remember correctly), their futures speculators in general are not taking huge amounts of money home. So it's not like the price of hedging was insanely high. They might lose up on potential profits but at the end, their job is not to take risks and have massive fluctuations in their pnl and go bankrupt every few years.
Another reason: Sustainable consumption level
Copied from wikipedia because I am lazy:
To sum up, what are speculators good for in the (industrial metals, energy and agriculture) futures market:
- They absorb risk, allowing producers, industrials and consumers to not get (sometimes massive) fluctuations in their costs & profits
- They may or may not price commodities more correctly via the research they do on those
- Sustainable consumption level
* Foreign Exchange
There are so many exports in the world. Go to any store, it will be full of foreign goods. "Made in China" everywhere.
Huge ship filled with huge containers are docking at Rotterdam every day.
The biggest port for this stuff is Shanghai in China. In 2018 they processed 42 million twenty-foot equivalent units (big containers). I guess one of those can hold 2 cars, or a small truck with a car on it, or 25,000 kg of goods.
Rotterdam is number 11 on the list with 14.5 million container equivalent processed.
According to this: www.thebalance.com/u...d-statistics-3306270
The USA in 2018 exported for $2.5 trillion and imported for $3.1 trillion.
People importing and exporting goods are probably going to work with several currencies.
They want to make money, the last thing they need is to lose money because of some foreign exchange fluctuation (countries have had fixed rates but it always ends bad as the forces of supply and demand mainly demand end up being too much to handle).
About the fixed rates: countryfolk end up paying for that. Either the taxpayer directly through taxes, or via inflation as central bank/governement prints imaginary money out of thin air to buy their currency (or sell) to maintain that rate/floor.
Even Bretton Woods system had its end.
"On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency."
Other hedgers might be someone from the US buying and selling a company. He buys a NZD company, its value goes up 15%, he sells for a profit and then converts back to usd. Wups, the NZDUSD rate dropped by 25% meanwhile, so he actually lost money.
One third of the forex volume (I think) comes from swap "buy a currency on day 1 and sell another on day 2".
Internet companies, like steam, can use the spot fx market for converting the money they made selling games (in this example) to europeans, into usd. Steam keeps their game prices stable, so either they take on the risk willingly, or perhaps they use the foreign exchange market to hedge against price fluctuations. I do not know what they do but this might be it. Ad revenue on the internet probably generates alot of forex trading...
Same concept once again. Various businesses (businesses is such a wide term) are not trying to gamble, they are selling a service on the internet, selling soybean to china (too early?), selling cars to the US, selling electronics to the world, paying salaries worldwide, foreign investors don't want their 50% up investments in a stock market to make them lose 20% because of currencies fluctuations etc.
Some have complained that speculators make the market more volatile, and hurt global operators especially those into import/export. And it's true when some investment bank traders are manipulating rates, obviously. The problem is not with speculating itself..
I would say speculators have these uses:
- Mitigate or even almost eliminate economic activities risk from unknown future prices.
- Fight idiotic central policies and forced rates, the way George Soros broke the bank of england. If it is possible to keep buying an undervalued currency, people are going to rob these central banks. Imagine you can buy a house at half the price in england...
- Maybe via analysing every information about a product, they help set the "right" price of a currency (making the market more efficient)
* Stock market
Speculators in the stock market:
- In the case of short sellers, they help remove capital from failing companies or even frauds (ENRON) & re-allocate it better, so they fight waste and prevent future investors from buying an overvalued company.
- The bring liquidity? So investors can more easilly buy or sell?
- They get excited and create bubbles that slow down the economy and causes millions of jobs to be lost?
- That's it?
* Bonds
I have no idea. I hope you didn't check this post to see what I thought about bonds.
* Crypto
- Help make criminals richer (drug dealers paedophiles terrorists north korea)
- Divert capital from the economy towards a ponzi scheme
- Parasites that add nothing to society
* Real Estate
- Create bubbles
- ???
they have no idea what it is for, the image I guess is fast cars and stupid banker drinking champagne all the time?
The wolf of wall street. Wolf of wall street was a stock broker, but they're all just the same to people aren't they?
Plenty of people get involved in markets, but I want to focus on what I do which is speculating.
Risk taking. Predicting the future. This is what 99% of new fresh retail traders think of when they first get in.
I rarely see a definition of what trading is, and I even never or very rarely see it divided in different areas (as I said on the chart, arbitrage market making etc are different from speculating).
Today for the first time someone is going to explain exactly what it is and what its purpose is, market by market (but really I'm going to explain for forex & futures which are my area of expertise and just throw out guesses for the rest).
And yes, it does serve a purpose, at least in forex & futures it does.
* Futures (Metals Agriculture Energy)
Futures markets allow farmers, industrials, miners, businesses in general, to conduct business efficiently without having to worry about price fluctuations.
This has to be the easiest to understand, because physical goods are involved and real people that need to buy or sell these goods regardless of events they have no control on.
This, the futures exchange market, has existed for at least 10 millenia. 10000 years! Can you believe it?
In 1750 BC, trading was carried out at temples, so they even had a trading floor like the CME before computers.
medium.com/market-pr...trading-631e9ab64fed
(On the internet you can find the story of Thales - the mathematician & philosopher you probably heard about at school- that predicted the olive harvest would be exceptional and speculated on that, and made alot of money doing so. That was 26 centuries ago).
Futures have existed for as long as agriculture did. Our entire civilisation is based and relies on futures!
Some examples:
Grains (Corn Wheat Soybeans Rice).
So to sum up:
- On one side: Farmers & Food manufacturers/distributors looking for price stability so they may run their business smoothly. Get rid of the risk. Their job is producing or processing food.
- On the other side: Speculators eating up all of the risk, miam miam miam nom nom nom, dealing with market fluctuations and portfolio fluctuations. Their job is to take risk and anticipate future price movements.
One could almost say with certitude, there would be no civilisation without speculators fulfilling this role. Complete mayhem.
Industrial metals:
Another example with food:
From a company that sells advice to food industries and manufacturers:
Supermarkets that put small businesses out of business are now also at a risk of closing shop, as consumers want the cheapest goods they can get:
Concrete simple quick example of when unhedged costs can really destroy a company:
They are completely vulnerable to the weather and other random events.
2 catastrophies and bankrupcies in less than 20 years are you serious?
And consumers are paying for it? See why futures are useful now?
Ah, energy. No point repeating the basic principle, it's the same as for industrial metals & various agri goods. let's look at a few bankrupcies. The most famous one might be ENRON but that's not because of price fluctuation it's because they were crooks. By the way ENRON CEO created a crypto the day he got out of jail. What a guy XD He's instantly back to scamming.
Energy Future Holdings.
Calpine Corporation.
Were, and still are, the largest generator of electricity from natural gas and geothermal resources in the United States. This is the opposite of the previous one. The previous one lost money because prices went down.
That one went bankrupt because costs went up.
All they had to do was buy long futures...
Businesses that buy and sell energy fuel are part of the market, whether they like it or not.
NOT buying long contracts inderectly makes them speculate the price will go down, OR that it won't go so high it will cripple them. Basically makes them bagholders holding onto a loser.
The company received $2 billion in financing to allow it to keep its plants supplying customers.
From taxpayers I assume?
The great rektage of 2015.
This is not an officially adopted name, it's one I choose to describe this. It should become the official term.
What happened?
More than 330 North American energy companies went bankrupt. Estimate of the cumulative debt fluctuate between 100 billion and 500 billion.
www.houstonchronicle...merican-12831308.php
The WSJ keeps track of the listed companies bankrupcy filings since 2015, I am not sure they are all here but anyway it's still big:
graphics.wsj.com/oil...ankruptcies-tracker/
Coal.
Not sure how this works, but some companies producing coal went bankrupt when prices started to fall.
James River Coal is still running, Patriot Coal is defunct, and its retired workers lost their health benefits.
For the employees themselves there is not much they can do there.
Recently you have US farmers that not only lost china as a customer, had their crops destroyed by a recent heat wave, but also have to deal with lower prices, because of the trade war (since demand dropped).
www.cnbc.com/2019/08...de-war----china.html
Still, they are defending Trump, and he has an approval rating of near 80% with them.
I know that even small farmers, not just big companies, participate in the futures market, but I don't really know how many.
Anyone is allowed to.
If there is 1 thing farmers industrials and utility companies can learn from this, it's don't gamble man.
Leave the gambling to the professional gamblers.
According to the CME (if I remember correctly), their futures speculators in general are not taking huge amounts of money home. So it's not like the price of hedging was insanely high. They might lose up on potential profits but at the end, their job is not to take risks and have massive fluctuations in their pnl and go bankrupt every few years.
Another reason: Sustainable consumption level
Copied from wikipedia because I am lazy:
To sum up, what are speculators good for in the (industrial metals, energy and agriculture) futures market:
- They absorb risk, allowing producers, industrials and consumers to not get (sometimes massive) fluctuations in their costs & profits
- They may or may not price commodities more correctly via the research they do on those
- Sustainable consumption level
* Foreign Exchange
There are so many exports in the world. Go to any store, it will be full of foreign goods. "Made in China" everywhere.
Huge ship filled with huge containers are docking at Rotterdam every day.
The biggest port for this stuff is Shanghai in China. In 2018 they processed 42 million twenty-foot equivalent units (big containers). I guess one of those can hold 2 cars, or a small truck with a car on it, or 25,000 kg of goods.
Rotterdam is number 11 on the list with 14.5 million container equivalent processed.
According to this: www.thebalance.com/u...d-statistics-3306270
The USA in 2018 exported for $2.5 trillion and imported for $3.1 trillion.
People importing and exporting goods are probably going to work with several currencies.
They want to make money, the last thing they need is to lose money because of some foreign exchange fluctuation (countries have had fixed rates but it always ends bad as the forces of supply and demand mainly demand end up being too much to handle).
About the fixed rates: countryfolk end up paying for that. Either the taxpayer directly through taxes, or via inflation as central bank/governement prints imaginary money out of thin air to buy their currency (or sell) to maintain that rate/floor.
Even Bretton Woods system had its end.
"On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency."
Other hedgers might be someone from the US buying and selling a company. He buys a NZD company, its value goes up 15%, he sells for a profit and then converts back to usd. Wups, the NZDUSD rate dropped by 25% meanwhile, so he actually lost money.
One third of the forex volume (I think) comes from swap "buy a currency on day 1 and sell another on day 2".
Internet companies, like steam, can use the spot fx market for converting the money they made selling games (in this example) to europeans, into usd. Steam keeps their game prices stable, so either they take on the risk willingly, or perhaps they use the foreign exchange market to hedge against price fluctuations. I do not know what they do but this might be it. Ad revenue on the internet probably generates alot of forex trading...
Same concept once again. Various businesses (businesses is such a wide term) are not trying to gamble, they are selling a service on the internet, selling soybean to china (too early?), selling cars to the US, selling electronics to the world, paying salaries worldwide, foreign investors don't want their 50% up investments in a stock market to make them lose 20% because of currencies fluctuations etc.
Some have complained that speculators make the market more volatile, and hurt global operators especially those into import/export. And it's true when some investment bank traders are manipulating rates, obviously. The problem is not with speculating itself..
I would say speculators have these uses:
- Mitigate or even almost eliminate economic activities risk from unknown future prices.
- Fight idiotic central policies and forced rates, the way George Soros broke the bank of england. If it is possible to keep buying an undervalued currency, people are going to rob these central banks. Imagine you can buy a house at half the price in england...
- Maybe via analysing every information about a product, they help set the "right" price of a currency (making the market more efficient)
* Stock market
Speculators in the stock market:
- In the case of short sellers, they help remove capital from failing companies or even frauds (ENRON) & re-allocate it better, so they fight waste and prevent future investors from buying an overvalued company.
- The bring liquidity? So investors can more easilly buy or sell?
- They get excited and create bubbles that slow down the economy and causes millions of jobs to be lost?
- That's it?
* Bonds
I have no idea. I hope you didn't check this post to see what I thought about bonds.
* Crypto
- Help make criminals richer (drug dealers paedophiles terrorists north korea)
- Divert capital from the economy towards a ponzi scheme
- Parasites that add nothing to society
* Real Estate
- Create bubbles
- ???
Comment:
Got to share this.
An economist, Richard Roll, a while ago, looked at the futures market price of orange juice, and found that it could be used to predict the weather (better than the "pros").
If this is legit... It's quite something.
A study carried out by Professor Richard Roll of the Graduate School of Management at the University of California sought to find out. In the resulting research paper, called "Orange Juice and Futures", published in the American Economic Review in December 1984, Roll found what he termed a "statistically significant relation between OJ returns and subsequent errors in temperature forecasts issued by the National Weather Service for the central Florida region."
In particular, if the closing orange juice futures price is higher than its opening price, we would obtain a more accurate prediction of the weather by adjusting downward the National Weather Service's weather forecast. This is because a higher futures price implies a smaller crop and colder weather. Correspondingly, if the orange juice futures price is lower than its opening price, we should adjust upwards.
"Do asset prices reflect fundamentals? Freshly squeezed evidence from the OJ market"
pages.stern.nyu.edu/...apers/fcoj jfe07.pdf
(OJ is probably more accurate than the average popular market because only pros that do their research and cut their losses are involved, whereas in a popular market that attracts alot of greedy eager noobs, there will be more randomness noise and nonsense)
An economist, Richard Roll, a while ago, looked at the futures market price of orange juice, and found that it could be used to predict the weather (better than the "pros").
If this is legit... It's quite something.
A study carried out by Professor Richard Roll of the Graduate School of Management at the University of California sought to find out. In the resulting research paper, called "Orange Juice and Futures", published in the American Economic Review in December 1984, Roll found what he termed a "statistically significant relation between OJ returns and subsequent errors in temperature forecasts issued by the National Weather Service for the central Florida region."
In particular, if the closing orange juice futures price is higher than its opening price, we would obtain a more accurate prediction of the weather by adjusting downward the National Weather Service's weather forecast. This is because a higher futures price implies a smaller crop and colder weather. Correspondingly, if the orange juice futures price is lower than its opening price, we should adjust upwards.
"Do asset prices reflect fundamentals? Freshly squeezed evidence from the OJ market"
pages.stern.nyu.edu/...apers/fcoj jfe07.pdf
(OJ is probably more accurate than the average popular market because only pros that do their research and cut their losses are involved, whereas in a popular market that attracts alot of greedy eager noobs, there will be more randomness noise and nonsense)
Comment:
Oh my, I should post a new idea, I found the ultimate purpose of speculators.
They are heroes! Saviors of humanity!
They are heroes! Saviors of humanity!
When oil prices are low on the west coast and high on the east coast this gives entrepreneurs an incentive to move oil from the west where it has low value to the east where it has high value
Speculators do the same thing but instead of moving resources through space they move them through time (using their better than average foresight abilities)
I feel illuminated after reading this. I have an inception moment right now.