Yeah. I'm trying to think how the trading of futures contracts on margin is helping to counteract speculators.
So, the phys traders are the culprits for smack-ups and smack-downs! :lol: Either way, the futures market was NOT "invented to counteract speculators".
And for those who take things a bit too literally, CrappyInvestopedia.blah is not the source of reliable investment advice
That's not hard: speculators cause price changes, hedging is receiving compensating money, that has to come from somewhere, and if the hedge works then it can only come from speculators (by inflicting them higher prices when buying, and lower prices when selling). Did you really try to think?
But he's right, the futures market was not "invented to counteract speculators", it was originally created to trade hedging instruments in order to address a need to monetizing or hedge future production.
Right about what? It's just Denial. The futures market is a place invented to hedge against price changes caused by forces of nature (supply side ex bad harvest) And the temporary buying by human speculators.
Some basics: - a hedge, is nothing but a compensating income in case a price goes in a way that inflicts an extra cost. - a hedge, also gives away eventual windfall profits. - a hedge, is seeking price-neutrality. A silver miner and a blancs producer, can agree a future trade. This agreement also includes a price. In order to be sure of this price: - the miner can take a number (related to the amount product in the agreement) of futures market short positions, so that in case the price would drop, the miner receives (on the fly with the price) dollars on his futures account, dollars that compensate for the lower price he gets for his future trade, effectively fixing his price to what was agreed. - the same applies to the blancs producer, whoms risk is a rising price, so he takes long positions, that will receive dollars in case the price would increase, effectively fixing his price to what was agreed. A very important thing to take into consideration here is that this compensating money HAS to come from somewhere. Someone HAS to end up paying it. And this was why the futures market was invented. Arbitration brings the futures prices (closest month quickest) and the cash/spot price together, because any difference is designed to deliver free dollars. An arbitrating transaction is nothing but just another trade. That designed profit is the created incentive to make arbitration happen. The creation > presence of the futures positions (longs & shorts), the net total of all, drives > keeps the cash / spot price up. In real terms, if speculators would normally have caused a $1 price increase, an equally sized hedge would double that to a $2 price increase. This also explains why silvers price is typically moved twice as much as golds, a typical futures market net total position is 50000, being 250 Moz or a quarter of worlds annual traded. Golds case / ratio is just half of that (percentual of course). People aside the hedgers are then required to pay more. Effectively, they are now paying those compensating dollars of the futures market hedge positions. This doesn't mean that the cash market buyers / sellers - speculators are bound to pay these dollars. They can be smarter, and hedging only works if the timing of the taking / dumping of the positions defeats (outspeeds/frontruns) speculators. Yet this isn't "that" easy, because commercial hedgers are producers, dealers, they know what they sell in the cash / spot market, while a dealers customer (ex a stacker) does not know how much others buy or sell. But, if you look at what they do (their net positions), it gives a clue on their current (on the term of the futures position ofc) price exposure / risk. The futures market was created / designed as a hedging environment. An environment / market segment that provides protection against people that drive up or down the price temporarly. With a price change, dollars flow between the short and long, ex when price increases, dollars are moved from (read: subtracted) the short to (read: added) long accounts. But that doesn't mean that the short position holder ENDS UP paying them. Because the short position holder ALSO holds the inverted position in the cash / spot market, for ex a silver stock of a dealer. If the price would rise (so short position holder sees dollars removed from his futures markets position account); he receives these dollars more in the cash / spot market. So, a succeeding hedge IMPLIES a speculator paying more than he should. Hedges can fail too, if speculators get smarter, and the timing of the taking & dumping of the hedging position becomes harder, with misses (too late) as result. Of course, some don't like aboves story too public.
Thankyou for your elementary reiteration of a futures market transaction. However, you conclusion as to why futures markets were invented is still incorrect. Your view is too narrow, and your mindset is fixated on the view that the futures markets are nothing but malicious and destructive, where all participants are sinister shysters trying to swindle each other. This is simply not the case. Futures transactions are often a win-win for both parties. It is about business risk and risk management - akin to insurance. Take for example an agricultural commodity processing company (this is real-life, as the organisation I am working for at the moment is actually performing these transactions): The processing facility needs to sure-up an agricultural crop for next year to stay in business. They can only do this if the farmers plant this year, but the regions farmers need a guaranteed price for next years crop to make it worthwhile planting this particular crop, instead of considering alternative crops. Added to this, the processing facility needs to inject capital into the plant this year to enable more efficient processing next year, but the banks wont secure credit facilities for this work given the uncertainty of both the crop-size and commodity price outlook for next year. Solution: forward-sell the commodity into next year. The farmers win, with a locked-in price that guarantees them a profit, and they start planting. The processing facility wins, because they have secured a crop for next year at a profitable price, and based on forward sales revenue the bank unlocks a credit facility which allows capital works to be completed. The efficiency gains achieved from this capital works program increases their margins, and they win again. The buyer wins, because they have shored-up supply for next year, and have allayed any price-risk for the next 12 months. This function of the futures markets facilitates stable business practice and successful business risk management with beneficial flow-on effects to any economy. There are no speculators involved in this transaction. However, speculators in the market provide liquidity which is essential in maintaining a viable, functional market. It is not rocket science that illiquidity can be damaging to a market, and can cause catastrophic price extremes. Business risk, and risk management is crucial to most industries. You may want to investigate market-risk and risk management a little further, given your spot-price track record. This link may also be helpful to your cause : http://forums.silverstackers.com/topic-59330-do-you-follow-comex-silver-activity.html
