Forum Post: What purpose does wallstreet serve, and does capitalism require speculative trading?
Posted 13 years ago on Nov. 15, 2011, 9:30 a.m. EST by fredastaire
(203)
This content is user submitted and not an official statement
legitimate positions will be added to the OP in a pro/con format.
There is a chance I will use this for a story on http://citicommons.com if you would like your real name in the story, please send me a private message with your real name. if you have a site, i will give you a free plug.
Pro
Level playing field for smaller companies
Speculative trading was created by the same people who created the Federal Reserve as a way to make money on nothing. Want to fix the markets? Require delivery of any commodity that's purchased. No more trading gold, wheat, silver, oil, oranges, pork bellies ect on paper. You buy it, you ARE taking delivery. You buy 500,000 barrels of oil on a December contract, then you fucking better have somewhere to put it come Dec 1st. That gets those not involved in production and distribution OUT of those markets and lets prices come down and stabilize.
great idea
this is a very good idea.
Slow down. Read my response below.
I did read it. but i don't see where financial institutions are required for this. the buyer could simply make the deal themselves in this area, directly from the supplier. The point of this post is to find what function wallstreet (yes i am using this generally to describe a variety of financial institutions) provides that could not be done without them. these institutions play a middleman role as you pointed out, to save cost and increase efficiency. if they are having the opposite effect on said product and the process could be handled differently, it only makes sense to point that out.
Again, a "market" is simply a place where a lot of transactions occur. As it stands, the "market" provides a transparent forum where buys and sellers collect in order to trade among themselves. While it is true each consumer could negotiate independently with the myriad suppliers, it would not be nearly as efficient or transparent. Big consumers' for example, would likely be able to squeeze out the little guys in obtaining access to the commodities required to operate their business.
"Big consumers' for example, would likely be able to squeeze out the little guys in obtaining access to the commodities required to operate their business."
how so?
Easy, by negotiating preferential pricing in exchange for volume, by threatening to take their business elsewhere if they sell to a competitor, etc. It's all happened before, and the transparency of the trading pit goes a long way in preventing such abuses.
fantastic explanation
Also note that futures trading in commodities is a leading indicator that helps suppliers (like farmers) understand what they will be able to sell for, what they should be growing, etc.
I honestly can't think of any good reason for futures trading in stocks, by the way. Can you?
i'm trying to state just enough to extract the info. the only agreement or disagreement would be an effort to get a stronger response.
Market price would be market price, just without paper traders running up the cost.
This is a seductive concept, and I was going to mention it myself, but it defeats one of the key purposes of commodity trading; companies trying to lock down the price of commodities they will need in the future so they can plan accordingly. The commodity they are buying doesn't EXIST at the time of the trade, so they CAN'T take possession.
Your concept would require that companies maintain a huge inventory of commodities in order to smooth the price curve of those commodities. This is extremely bad for a company's cash-flow and runs counter to the desire to minimize inventory cost. It can't even do DONE with perishable commodities.
After considering all this, I came to the conclusion that we might jack up taxes on short term gains and drop them on long term gains. We could set the terms differently according to each commodity as appropriate for that commodity. This should help get the speculative day-traders out of the markets.
Again those involved in the production and distribution are not affected, it's the hedge fund traders on Wall St that get cut out. They don't use the products all they do is create artificial shortages and jack up prices.
George Sorros isn't involved in the production or distribution of energy, so why should he be tying up billions in oil contracts raising energy prices for everyone else?
You certainly figured out I disagreed with your proposal, but you apparently didn't read what I wrote. If you want me to buy into your idea, you'll need to address the specific concerns I raised.
What I'm talking about here are the paper traders, you know those that have no production use for the commodity, those who buy aluminum and don't even know what bauxite or aluminum billet looks like. Those who buy oil contracts and don't refine oil into gasoline, plastics, pharmaceuticals ect. They'e OUT of the trading. All they do is increase costs to those who actually use the commodity in production and of course increase the price for the end user. What I'm talking about does not cause companies like Alcoa to have to keep huge amounts of bauxite on hand. They use the commodity for production, so they can buy it on the market while hedge fund traders who just bottleneck the flow of commodities buy buying up contracts with no intent of delivery and only do so for the sole purpose of milking other companies and consumers are cut out of the trades. Alcoa can get their bauxite, the city gets it's lamp post, you and I can get lower prices and people like George Sorros get to go fuck themselves.
The original intent of the futures market was to allow companies to nail down the future costs of goods they need. I agree that paper traders cause a lot of problems, but we can't eliminate the value of the futures market to the industrial consumers. This is why I argue to moderate the day-traders by imposing higher taxes on short-term gains. If we set the term distinguishing short and long term equal to the length of the consumer's average pipeline, we penalize those who trade before the delivery contract comes due. This term would be comparatively short for perishables and longer for non-perishables.
By taxing trades that occur before the delivery date of a commodity, we essentially provide the restraint you're seeking without losing the benefits of futures trading for those who actually plan to take possession.
this is going up top!
Which is basically what happens today.
I buy the oil you mention on Nov 1st and sell it Nov 20th.
I'll hedge against the risk I have to take delivery by contracting with a storage facility, "just in case." Or I'll ask the seller for an extension and pay him a fee for his troubles. I'm sure we can work something out.
Your proposal won't change a thing because it's already how it's done. One of the risks in commodities speculation is that you may need to actually take delivery of the commodity.
I'm talking about removing those not involved in the process from production to distribution from the system so they can't run up the prices. There is no reason other then running up prices for everyone else that a stuffed suit in NY needs to be involved in purchasing oil that hasn't even been pumped from the ground yet. All speculators do is create artificial shortages to run up prices. This should at least be banned on energy and food.
That's different than what you said above. You said the way to fix it is to require the buyer take delivery. Now you are saying there should be a restriction on who is allowed to buy it at all. Two different things.
I think what he's saying is that requiring them to take delivery is a way to remove them from the process. It's the hope that storage costs will outweigh any profit that can be made. Removing them from the market through legislation makes that open to court challenge, but requiring delivery can be done through the swipe of a regulators pen. It' HOW you remove them from the process. One way bites you in the ass, the other makes it too expensive to turn a profit if you're not involved in production and distribution of said good.
Right, I'm just saying storage costs don't outweigh the profit, and they are already contractually obliged to take delivery, and most of the time sell before said delivery date so all I'm saying is I doubt it will remove them from the process.
That's pretty much spot on there Joe.
Wall St. is supposed to serve the larger economy (the real economy) by arranging financing. If you look at the whole economy as a corporation, Wall St. is a service center, not a profit center. As individuals and companies they are allowed fees for their arranging services.
However, they have forgotten their place in the larger scheme of things. Wall St. has decided it is not the tail, but is now the dog.
Speculative trading on essentials, like foodstuffs and fuels, should be restricted to stakeholders in that market (i.e., those that have storage facilities and would be buying these products anyway in the absence of speculative trading). There is no vulture, parasite license.
I dig this but if you could be more detailed. i would like to use this to show exactly what you are saying but in technical terms.
if speculators don't want to accept delivery of a futures, they have to sell the contract to someone else before expiry.
when they sell a contract, they implicitly push prices down.
this is incorrect. They take a small hit, maybe, but only on the estimated gains. they are almost never sold at a loss. even in this market.
that means more people are buying and accepting delivery than speculating.
sounds like more regulation is needed
Pros: 1) Opportunity to make money through intelligence instead of labor 2) Immediate reward and punishment for being right or wrong. No grey areas.
When I read through this discussion, I think of the 9/11 attacks on the world trade center. Where it looks as though the way we conduct business may have brought on this whole disaster we are in? Though I have to admit the wall street jargon can get somewhat complicated to comprehend.. they know it and we know .. and a lot could be hidden behind such complexity.. very invigorating post
i thought so. the entire protest is focused on wallstreet but nobody in OWS seems to find it a priority to address what they are protesting with intelligent debate and fact finding. this seems like an obvious first step to forming a demand aimed at wallstreet. if this is not the intention of OWS, than the entire thing is a farce.
where did price inflation come from? there's lots of data that shows spread between bid/ask shrinks the more participants there are and that price more quickly and accurately finds its equilibrium value in a market.
where it may not there may be some manipulation or psychology or something at play - but if this is fraud it can happen in any system and should be rooted out, if these are errors then eventually the system will root them out as well as they are not likely to be permanent or easy to maintain.
it raises capital for businesses.
speculation in and of itself is not a bad thing.
closer the people, making the trade, are to perfect transparent information the lower the leverage is of the speculator. in this climate i think it would be harder for IPOs to be bet against, at least against it speculatively. But others may believe that the shenanigans that go on during IPOs are productive in the long haul.
could you elaborate. to qualify it needs to be something that could not be done outside the structure of wallstreet. we aren't arguing capitalism, i am a pro-capitalism liberal.
these both can, but wall street allows more people to participate. i make Ron Lawl 2012 vinyl cling window stickers. should i sell them on a new site i make, or on ebay? same reason this stuff is done on wall street.
Financial institutions provide capital via many different types of instruments, each of which is a tool for a particular job. Like many tools, they require skill to be used effectively. Moat companies want to focus on their own purposes, building widgets, catering weddings, what have you. They don't want to get bogged down in complex financial dealings. "Wall Street" provides valuable services to these companies for fees which the companies pay. The companies generally feel they get more value by paying these fees than if they were to deal with these things themselves.
For example, a company has offices in NY and London, and has to deal internally and externally trying to do business in 2 different currencies. A financial institution can work with the company to protect it from the day to day fluctuations in the exchange rates of the 2 currencies which would make conducting the company's day to day business too unpredictable.
There are, of course, thousands of other examples, many quite complex, but even the most complicated derivative serves some core purpose.
Like any tool, these tools can also be misused. CDSs are an example where a legitimate instrument serving a specific purpose were then misused by some.
As for speculation, of course it has a place. Every single loan granted is a form of speculation. And all trading is speculative, it is just a matter of varying degrees.
I don't see anything in here that requires wallstreet. currency trade takes place outside wallstreet every day. Could you elaborate on the advantages of using wallstreet to assist these processes?
All of these financial transactions involve TRADING. Before the advent of computers, trading required face-to-face contact. Wall Street emerged as the go-to place to conduct these trades. Since the advent of the computer, many of the services provided by Wall Street could be distributed; it is only history that concentrates them where they are. Really large transactions crossing boundaries, such as borrowing to buy a competitor's stock, still benefit from having all the associated players in one place simply to enable discussions (nobody does $2 billion dollar deals without some face-to-face).
Historical precedent is ALSO what puts most trading in farm derived commodities in Chicago. It's also what leads to so many start-ups continuing to emerge in Silicon Valley. There are many more examples in our society.
Wall Street is a narrow little street in downtown New York City.
I am talking about financial institutions and the services they provide, for a fee.
People and companies do not "need" to use these services nor pay the fees associated with them. Many do because, presumably, they perceive value in doing so.
right, but for us laymen, what would that value be. I'm not demonizing it. trying to get some dialog on the actual focus of the protest. we haven't really done this yet.
All right I will give this a shot but keep in mind it is a simplification.
The value basically derives from expertise and the ability to apply that expertise to a client's benefit. Most people who have a business are not financial experts and most businesses serve some purpose other than financial services. So Sally ows a successful book store that has begun to expand into a chain. She knows about books, she doesn't know how to deal with the financial complexities of taking a single bookstore to a chain. She knows her book store is successful and believes she could expand it. She goes and talks to a banker about what her options are to raise capital so she can expand.
There are millions of Sallies out there and the answer for what is the best way for them to meet whatever their goal is will be different depending on their circumstances. For some smaller ones maybe it's a simple business loan. For others it may be finding venture capital. For others going public might be the thing to do.
What they have in common is they are in business in some area of expertise. They are contractors or dry cleaners or store owners or one of a million other things but they are none of them experts in how to raise money or manage money to make their particular things happen.
We are too general when we say "Wall Street." The financial institutions, commodity brokers, and stock brokers of Wall Street each play a different role.
The financial institutions move capital to where it is needed. This is, in and off itself, a positive thing, but we need to ensure they are operating fairly, ethically, and without introducing systemic risk. The CONCEPT of credit swaps is rooted in statistics and is a sound approach to mitigating risk. The algorithms being used, however, did not include provisions for systemic downturn that renders the statistical assumptions invalid. These guys certainly need to be regulated to ensure they are operating properly, but the service they provide is valuable and necessary.
The commodity traders provide a valuable service to industry by allowing them to lock down the cost of the raw materials they need. Unfortunately, there is also a lot of speculation in these markets, and that distorts prices.
The stock traders provide a valuable service in allowing companies to get capital at low cost from a broad swath of society comprised primarily of "average joes" willing to lend in exchange for a cut of the profits. The alternative would be to use bankers and bonds, but both carry cost to the borrower that is not present in a stock issue. Like the other two components of Wall Street, speculation often distorts the stock market.
Speculation is a key problem in all operations of Wall Street. I know of no good way to limit it other than to raise the tax on short term gains and drop the tax on long term gains. I'm interested in hearing alternate ideas.
I'm not interested in being published on your site. I only wanted to offer what I feel are balancing perspectives to a topic that is overly generalized and full of passion.
no worries, i will only mention those interested n being mentioned. could you nail down a detailed pro or con? sounds stupid i know, but your reply is to balanced lol :)
Like any complex topic, there is no black and white response. These institutions EMERGED and CONTINUE because they satisfy a need. At the same time, we have seen that they can cause real trouble if not properly regulated.
Sorry, no black, no white, just gray !
P.S. You can mention me as 'Rico on OWS Forums, but that's it.