On Mar 24, 10:53*am, Han wrote:
" wrote :
On Mar 24, 8:44*am, Han wrote:
Kurt Ullman wrote
innews:HsednRKmoOIBI_DSnZ2dnUVZ_
:
In article ,
*"Robert Green" wrote:
commodities markets went from $13 billion to $300 billion. Last
year, 27 barrels of crude were being traded every day on the New
York Mercantile Exchange for every one barrel of oil that was
actually being consumed in the United States. *source:
http://www.cbsnews.com/2100-18560_162-4707770.html
* *Since oil is fungible and a world-wide market, *this is a bogu
s
* *stat.
The REALLY interesting one would how many are traded worldwide
versus how many are use worldwide.
I had to look up fungible, and I'm not sure I fully understand
anything more than a version of "easily substituted". *Statistics are
always suspect, since we usually don't know all the premises and
limitations to the calculations. *But bogus is too strong a word,
IMO.
Nevertheless, since the US share of the world oil market is in the
order of 25%, substantially more than the ~4% as the 27-fold multiple
of trades over uses of 1 barrel suggests, the much repeated selling
of that same barrel of oil seems excessive. *In the aggregate and on
average such trading cannot possibly reduce the average price of oil,
since every trade costs something.
So, yes the trading functions a bit to hedge and keep the prices in a
free market range, but that range is increased by the speculation.
And your definitive proof for that would be? * Crickets.
Have you ever traded a single futures contract? *I can just as
easily make a case that speculation decreases the range.
Again, there are speculators ON BOTH SIDES, LONG and
SHORT. * You raised the example of rumors moving the
market. *Let's say oil was at $100 and some rumor starts
moving it to $103. * There are speculators that have been
around for decades. *They know that most of these rumors
are just that, rumors. *So, seeing it move up $3, they now
have an opportunity to short it, expecting it to move back
down. * Later in the day, the price settles back to $102
and the speculator covers the short, taking his profit.
That action lessens the price move. *It's also what a huge
amount of that volume is all about.
Regarding daily volume in futures, you've got it all wrong.
First, the CBS comparison of
futures volume versus US usage, as Kurt pointed out, is totally
bogus. *Oil is a worldwide market, people use oil all over the
world. *Participants in the US futures market are all over the
world and they will continue to be, unless we let you drive
them out. *In which case, the business will just move to a
more friendly country where perhaps it will be less regulated.
How would you like that?
If you compare the futures volume to worldwide production,
about a weeks worth of contracts change hands each day.
So, for CBS, the correct ratio is not 27:1 but more like 7:1.
Now it's kind of odd that someone who AFAIK has never
traded a single futures contract of any kind would know
what the "right" volume should be. *But tell us, what is
the right number from your magic ball?
What you have backwards here is that volume is a bad
thing. *It's a very good thing that leads to efficient pricing
and liquidity. * Let's say you need to sell 1000 shares of
a stock first thing Monday morning. *Which market would
you rather that stock be in? *The pink sheets of stocks
where if you're lucky, they might trade a few thousand
shares a day? * Or would you want it to be one of the
NASDAQ stocks where they do millions of shares a day?
In the latter case, you could enter a market order, have
it filled in a second at a fair price. *Try that in the other
market and see what happens. The more activity you
have in a trading environment, the better.
I am focusing on the example you give above. *The rumor that ups the
price to $103, the speculator shorting it, and then the price falling
back to $102, from the initial $100. *Seems to me there is a net increase
in this example and also a cost of trading.
Sure there is a net increase. So, what? In the example,
the market reacted to
some rumor and moved up $3 for a brief period going to $103
from $100. The speculators/ traders figure the rumor is likely
overblown, bogus whatever and see an opportunity to profit
because they figure the price will be coming right back down.
They short it at $103 and a few hours later as the
price is going down, they
cover it at $102 taking there profit. The price could continue
to go down to $100. Or the price could go to $96 because
now all the dummies that believed the rumor are selling.
None of that matters. The point here is that this is an
example of a common situation where the specs, through
their actions, are mitigating the price rise caused by
the rumor. If you didn't have the specs taking the opportunity
to profit by trading against the rumor, the price could have
gone to $104, $105, etc. on the rumor.
These same specs provide the liquidity so that there is
someone there ready and willing to take the other side
of any order that shows up without it impacting price
much.
*Or is all that trading back
and forth free? *It may be a small amount, but there is a cost, and it
all adds up. *Maybe that is why the price always goes up fast, and comes
down slow.
The cost of doing that trade for a pro, say a floor trader
is a couple bucks per contract. Even for a small retail
trader it can be done for $12. So, the transaction cost
of a few bucks on $100,000
worth of oil isn't a factor. And whatever the cost, for
that type of trade, it's coming out of the pocket of the
speculator, not any oil producer or consumer. A spec
scalping like that could be in and out of the market
20 times in a day. United Airlines or XYZ oil is going
to go long or short and and hold it for months so their
transaction cost is almost zilch.
And you're right, I am leery of sticking my neck out and going into
futures. *So I know nothing about it ...
--
Then why do you buy into the nonsense that it's speculators
that are driving up the price of oil as opposed to supply and
demand?
Best regards
Han
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