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And I'm convinced that market manipulation is systemic and institutionalised: in fact the definition of "trading" now appears to be "acceptable market manipulation".

The losers in this "bezzle" (J K Galbraith's wonderful expression for when the losers don't know they are losing)are the "end users" who use markets to "hedge", and small time traders without the access to information the big boys have..

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 26th, 2007 at 02:26:36 PM EST
[ Parent ]
I thought the mechanics of hedging were quite straightforward and the time frames involved much loger than the high-frequency speculative trading, so how do hedgers "lose"?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 05:21:41 PM EST
[ Parent ]
that's an inaccurate name.  They just have the freedom to be both long and short and to use leverage beyond what mutual funds can do.
by HiD on Tue Mar 27th, 2007 at 04:03:33 AM EST
[ Parent ]
I know "hedge fund" is a misnomer. What I'm asking is how do honest hedgers lose out?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 04:43:58 AM EST
[ Parent ]
specifically the IPE where a lot of game playing has gone on especially at the close in the past.

A real hedger doesn't lose.  say you wish to buy oil next month at $50 and that's where the future is trading.  You go buy your hedge.  Then come the day you want the physical oil you buy at noon and then sell his hedge off simultaneously (or just does an efp -- trades oil for futures) he at most loses the bid/ask.  No harm.

Some big sellers (say a Scandihooligan) sell large quantitiies of physical oil off of the IPE settles on a derivative basis.  That is, they use the settle to price a physical sale without going through the futures for most of the oil.  So another player(the buyer) can trash the settle with a much smaller quantity and gain a profit.  The problem is letting the other side have leverage.

there are easy solutions to the problem

  1.  Actually hedge.  Sell the oil on the exchange as they see fit and then take back futures on an EFP when they actually sell the oil

  2.  sell the oil fixed price and avoid the exchange all together.

But they won't.  They'd much rather piss and moan and blame manipulation than take responsibility.  So they price off of Platts (journalist "assessments" of the market based on trying to sort through the lies) or market settles.  And wonder why the settles get moved against them on an exchange with low volume and no physical delivery requirements.  Not to mention they try to sell to traders at real value + a few cents thinking their average oil is always worth more than average.
by HiD on Tue Mar 27th, 2007 at 05:10:33 AM EST
[ Parent ]
A real hedger doesn't lose.

Thanks, exactly what I wanted Chris to ackowledge.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 05:14:50 AM EST
[ Parent ]
So if I buy an option that is overpriced because the volatility is entirely manufactured then I haven't lost?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Mar 27th, 2007 at 07:26:42 AM EST
[ Parent ]
A real hedger SHOULDN'T lose for sure.

But the real hedgers don't have the advantages of the guys sitting in the middle in terms of access to data and order flow.

And if a Big Oil company is in cahoots with a Big Investment Bank - a not unlikely scenario - then other market players can get doubly screwed.

All you have to do is:

(a) add up the profits made by Goldman Sachs, Morgan Stanley energy desks - not to mention BP's trading profits - and ask yourself why the top people in the Banks got where they did; and
(b) why every other investment bank is queuing up to poach energy teams from their competition; and
(c) why star energy traders head for hedge funds, because they don't see why their employer should get so much of the profit THEY are making; and the $64 billion question
(d) at whose expense are these multi billion "super-profits" (I don't begrudge trading profits, by the way) being made?

The answer to that is hedging "end user" producers and consumers, and, increasingly, hedge funds.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 27th, 2007 at 07:42:50 AM EST
[ Parent ]
though I've tried a number of times.  
by HiD on Tue Mar 27th, 2007 at 05:24:26 PM EST
[ Parent ]
An investment in an index fund, such as the Vanguard 500 in 1987 would have grown from $30 per share to $132 today--plus provided a 1.5% dividend per year.  Those baby boomers who have maxed out their 401K's over their working lives are going to be fine in their retirement years, due to straightforward investments such as these, left alone in their accounts, not taxed until withdrawal after 65.  The long term return on these simple index investments is 10% per year, and investors who have done this have done unbelievably well--and that includes the impact of an economic setback in 2000 of the tech crash, 9/11 and the Iraqi war.

I'm not sure what you are getting at with your heldging comment, but people are hedging everyday on many transactions simply because they want to take financial risk out of their life--farmers, business people, investors.  If you want to lock in a payment being made to you in Euro's in 6 months, lock it in in dollar terms because you are a US citizen,,you can do that--and not worry about hoping the Euro is still worth the same as today in 6 months.  On the other hand if you think the euro will be stronger and you want to take that risk, you can just wait and see what happens.  to me, it's all about having those choices--and it's certainly been a good thing for me in the past.

by wchurchill on Mon Mar 26th, 2007 at 07:03:11 PM EST
[ Parent ]
by your own experiences.

The stock markets are not as black as you see them based on your exposure to a much uglier commodity market where players are assumed to be expert and have their eyes open.  For example, commod players are not only allowed but are expected to be trading based on info not widely known in the market.  That's illegal in the stock markets.  If your company is about to announce a new product, it cannot do a big stock buyback the day before.  If your refinery is burning, you can buy like hell if you can move faster than the others.

Real hedgers have opportunity to avoid game playing, they just have to not get talked into badly designed instruments/strategies marketed by exchanges like the IPE.

by HiD on Tue Mar 27th, 2007 at 04:15:53 AM EST
[ Parent ]

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