Monday, June 16, 2008

NY Times Article Explains The Role of Speculators

The NY Times has an article that does a pretty good job of explaining the role of speculators in the futures markets, and highlights some of the benefits they bring to the market: Greater volume of trading, leading to greater liquidity, and thicker, more efficient commodity and futures markets, and even possibly less price volatility. Here are some excepts:

Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all.

Speculators, people willing to risk their capital in search of high profits, are central to healthy commodity markets, they say, and broad-brush restrictions on them could damage markets that are already under pressure from rising global demand for food and fuel.

The more money that speculators are willing to put to work in the market, the more liquid it is and the easier it is to buy and sell without causing big ripples in prices.

So speculators become the ballast in the market, making the contrary trades, taking on the risks the hedgers want to shed, reacting quickly when news jolts the markets and, most important, creating liquidity by pouring in enough money to allow everyone to make very large trades quickly without causing wild price swings.

Liquidity is, in effect, the hostess gift that speculators bring to every market party, and without the capital poured into energy markets by institutional investors, prices may well be far higher and more volatile than they are, said Philip K. Verleger Jr., an economist and energy policy consultant who testifies frequently before Congress on energy issues.

Mr. Verleger said he strongly disagrees with the view that these new speculators are pushing up the price of oil and other commodities. “In fact, they have at a minimum reduced price volatility and quite possibly contributed to a lower price level than would have been obtained had they been barred from the commodity markets,” he said.

6 Comments:

At 6/16/2008 11:22 AM, Anonymous E. Harokopos said...

Here are my comments about the article:

1) "Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all."

This is a red herring. It assumes that for some reason "commodity markets", the way they are setup should be present. But commodity futures exchanges only appeared in the mid to late 70's. Oil contracts appeared in 1983 if I am correct. Economies existed long before that. The premise that commodity future market cannot operate without speculators is true but that does not imply these markets are necessary, and by implication, id does not imply that speculators are necessary.

(2) A market manipulator is also a speculator but not all speculators are willingly market manipulators. However, when there is excessive speculation, all speculators contribute to the rise or fall in price that amounts to an equivalent move that would have been obtained by manipulation.

Thus, the net effect of excessive speculation is the same with intensional manipulation.

As I have said before, these markets are not necessary and can be replaced by Forward Agreements. The world and markets existed long before futures markets were put in place so an elite in Chicago can profits for brokering transactions.

These markets should be shut down the sooner the better.

Due to unprovoked attacks from some people with apparently serious problems I will not be posting any longer.

 
At 6/16/2008 1:27 PM, Blogger juandos said...

Well it seems that Diana B. Henriques does a better job at explaining speculators than Paul Krugman does trying to say that Bush Tax Cuts are the Equivalent of the Financial Poison Pill

 
At 6/16/2008 2:02 PM, Anonymous Anonymous said...

The problem is stupid Americans.

Just how stupid are we?

http://www.youtube.com/watch?v=vqDi1Vi-2qo

 
At 6/16/2008 3:47 PM, Blogger juandos said...

The second comment nailed it regarding that madrassa matriculated (a.k.a. ivy league schools) clown who put the video up there...

 
At 6/16/2008 8:29 PM, Anonymous Anonymous said...

e. harokopos has it correct.

Seriously, what happened to that link to Congressional testimony that I posted in comments awhile back? I sent it to Prof Perry, but he is either ideologically biased against considering all of the facts, or highly invested in the idea that S&D factors actually produce efficient markets.

Enron, front-running, and other examples of financial subterfuge ought to disabuse an intelligent person from thinking that a market as complex as petroleum is can find a natural equilibrium via simple demand and supply.

skh.pcola

 
At 6/17/2008 4:00 AM, Blogger OBloodyHell said...

> Seriously, what happened to that link to Congressional testimony that I posted in comments awhile back? I sent it to Prof Perry, but he is either ideologically biased against considering all of the facts, or highly invested in the idea that S&D factors actually produce efficient markets.

Or perhaps he just didn't find it credible or accurate.

No -- "It MUST be bias. ***I*** know my opinion is right!!"

:-/

Get over yourself. Why the hell didn't YOU repost it here, if it was so wonderful?

Of course, then we might have beem able to judge for ourselves about whether or not it was a crock of useless shit.

Much better to leave it out and snidely attempt to smear Perry, right?


What, did you think we couldn't figure that out ?

Yeesh.

You've been posting too much on The Daily Kos and the HuffPo, where thinking is not allowed.

 

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