> Without trying to fall too hard into a potential late-stage-capitalism hole, what is the advantages on trading like this? Beyond the advantages of making money on futures
Trying to view things as “late stage capitalism” isn’t a good way to really understand anything. It’s a cynical Reddit trope that assumes malice from the start, which doesn’t leave much room for a real explanation.
The reality is that trading like this is a type of contract and it takes two parties to enter into the contract voluntarily. Nobody is forced to trade energy contracts this way, but it can be helpful for both parties to do things like lock in more predictable pricing, hedge certain types of risks, and agree to mutual contracts that benefit both parties’ businesses.
Energy prices going negative sounds like something evil or malicious or “late stage capitalism” to the uninitiated, but even without trading errors there are legitimate reasons to have negative energy prices at certain times of day. For example, certain types of power plants like nuclear can’t quickly ramp up or down as demand changes. A power company might come out ahead by pricing power negative (that is, paying people to consume it) for certain night time hours if it allows them to keep the power plant at a higher, continuous output in preparation for peak times. Energy hungry industries such as aluminum manufacturing or other industrial processes might gladly adjust their production schedules to operate during these times to take advantage of the low or negative pricing. Everybody wins.
There are numerous dynamics like this at play. It’s not a “late stage capitalism” thing, despite how some people like to sneer at anything they don’t understand. There are legitimate reasons to operate this as a market and let market participants work out optimal deals.
> Producers already got paid for this production a long time ago
It's a future market for the public. You don't know which side you are trading with (trader or producer) but they are all trading at all times even if they are not transacting.
Here is an example: Let's say you are a producer that a sold a future contract a long time ago at $25. You have the opportunity to buy that contract again today at -25$ and close your position. You have no oil to deliver + you made $50 per barrel more than what oil is trading at in Europe.
Given that we can conclude:
- Big producers are refusing the close positions to keep prices down. (or maybe they have a legitimate reason why they want to deliver their contracts?)
- The market temporarily dipped because of leveraged trading. Traders were a sleep/slow to react. (they don't have automated bots?)
- This price range (maybe not -25$ but maybe $5-0) is the real price of oil for these few days.
> Why is it that every time someone mentions futures trading
They didn't just mentioned, they had an outsider negative take on it.
The best way is to respond with simple examples.
> What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that the farmers can no longer grow crops on?
How does futures trading cause these negatives? If anything, trading reduces these risks. Countries with markets have large bounties as opposed to those that don't.
> Suppose our hypothetical farmer can buy a put option to underpin the sale price.
Futures and options are different.
Options are the right but not the obligation to buy or sell at a given price and time (and often at any point up until that time). This optionality comes at a high price.
Futures are the right AND the obligation to buy or sell at a given price and time. This construct, because of a better balance between buyers and sellers [of the contract], costs much[, much] less per $1M than options.
> It becomes a gamble if one is subsisting.
Life is a gamble by that measure.
I tend to think that things that reduce overall variance to be hedges and things that increase variance to be gambling. Selling futures against a future crop harvest for me is on the reduce variance/hedge side of the line, by a lot. Buying jet fuel futures as an airline? Same.
> Price contracts are a thing. You can do this in new england with fuel oil for heating. It is fairly common.
> But futures pay today for a product at some later date. It's a loan as well.
This does not compute. You say forward contracts are common but futures give you money today? Futures are standardised forward contracts, you don't get any money when you open them unless your futures are different than mine?
> And as a producer it's not just a hedge on price. What happens if your expect to yield 140 bushels of corn an acre, and only get 130? Your crop came in, so no insurance, how do you make up the missing bushels? You're buying those futures back or delivering the contract even at 10x the price.
Exactly right hence why I said 'some'? You hedge when you can to lock in e.g. aforementioned 30%.
> There is a reason that there are specialists in marketing and delivery of products with futures markets that help them plan.
Completely agree - but it isn't that complicated with futures. Now options...
> Stocks prices are in large part dictated by corporate profits
I've also worked for a company with negative profits and a positive stock price which is also one of those things that tends to confuse me. (I'm aware that I'm pretty obtuse, but it's not all an act - I really don't get how much of the modern economy works.) I understand that the expectation is that profits will turn positive/grow over time, but that would seem to require the ability to accurately forecast the future, which seems problematic.
Way too much of the modern economy looks to me like the South Park "Underwear Gnomes" model which you see memeified sometimes - the step 1: steal underpants, step 2: ?, step 3: profit, thing.
>To me, this form of trading has questionable economic effects in my opinion.
Have you ever actually researched the economic effects, or is that just a gut feeling?
If you look at it historically, as machines have come to dominate market making, spreads (the difference between buy and sell price) have continually fallen, meaning institutional investors and retailers can buy what they want at a better price. Machines are able to offer these better deals because they know they can get out of their position faster if the market suddenly moves; removing their ability to react faster would remove their ability to offer better prices.
>Speculation on futures seems dumb if you have no intention of taking delivery
What? How is it any more dumb than speculating and buying a stock hoping it will go up?
Speculation in futures is what gives those farmers liquidity in the markets.
Futures is a zero-sum game.. so in my world futures make way more sense to trade than everything throwing money into stocks to magically make money out of thin air until they don't.
> When the oil futures went negative, it wasn't the case that the value of oil was negative
The value of the futures is different than the value of the oil itself. Besides, the end result of a future is taking delivery. Most futures contract buyers have no intention of taking delivery, and have no way to take delivery. That explains the negative value of those futures.
> I'd expand that you actually have to define what value means to you, relative to the context in which the discussion is taking place. You'll likely find yourself considering value from different perspectives in different situations
That doesn't change at all the fact that the value is determined by what someone is willing to pay for it. That value is different for different people, as you say.
> I'd be surprised if people pretend the market is still rational: see nfts. Or the modern stock market.
NFTs are an entertainment / art product. Them having non-zero value is the same as the original Mona Lisa selling for more than a perfect replica.
What about the stock market are you darkly hinting at?
> Not to mention the market irrationally rewards short term good (or even bad) and long term bad behavior, but it does it consistently, so no long term good behavior can ever win out. See: oil and gas industry.
I'm not sure what you are talking about. Could you be more explicit, please?
> All solutions that try to handwave people out of the equation, which includes market based ones, are the wrong path imo.
Sounds like a straw man? Who is waving people out of the equation and how?
> What does the existence of the futures market allow me to do that I can't already do in this scenario?
Leverage.
So I had a look at live data for an example. As of writing, 1GBP = 1.28 USD. Let's look at some example scenarios, assuming I believe 1 GBP will be worth 1.41 USD (+10%) in 3 months and want to make as much money as I can with a $100k investment.
- I buy USD from a regular bank or currency exchanger and wait 3 months. If the price goes up 10%, I make $10k. If the price goes down 10%, I lose $10k. If nothing happens, I lose nothing.
- I buy GBPUSD futures contracts. I need $7346.25 margin to open the contracts and $5877 to maintain them (per https://www.interactivebrokers.com/en/index.php?f=marginnew&...) and I control 62500GBP ($80k) per contract. With $100k, I can buy 13 contracts and control $1.04M. If the price goes up 10%, I make $100k. If it goes down 10%, I lose $100k.
And then, for fun:
- I buy 86 options for a GBPUSD futures contract at a strike of $1.28 for $99k. If the price goes up 10%, I make $593k. If the price is at ~$1.30, I lose nothing. If the price is below $1.28, I lose $99k.
I'm no expert on futures however so there might be something wrong here, though the answer is definitely leverage.
> This situation isn’t exactly a poster child for the Efficient Markets Hypothesis.
I'm unsure why you're criticizing the Efficient Markets Hypothesis or even using it here, but you need to also analyze this with some time horizon because the market and marketplaces are not static.
Is that so? In theory, derivatives like futures can increase the efficiency of market clearing. Nevertheless, it is apparent that the price of oil is many times more volatile than the price of downstream finished goods using oil.
>Futures contracts that CAN BECOME NEGATIVE don't let large leverage when price is near zero, that's NOT TRUE
It clearly is. If I can buy a contract for 1c, I can get 100,000 contracts for 1000usd. Then if the price rises of falls by 1usd, I'm up/down 100,000 dollars. Can you think of any retail product with that sort of leverage?
That's the danger of putting zero in a denominator.
> I would argue that futures (and options) are still gambling.
And you would be wrong because those instruments were designed to hedge (reduce) risk. If you are a grain producer and you are worried that the grain price might go down before your next crop you sell a future to lock the price, if you are a flour mill and worry that the price will go up you buy a future.
Can all financial instruments be used for speculation? Of course, same as buying a ton of grain not because you need it but because you expect the price to go up.
>“What this represents is a cynical attempt at setting up what’s almost like a betting casino so some people can make money from others suffering,” Basav Sen, climate justice project director at the Institute for Policy Studies
question that seems to have been neglected in this thread: how does the existence of a futures market over an asset affect the price of that asset? -'cause that's what the quote implies.
>Our fictional speculator either accepts delivery of the thing, in which case they have to warehouse it and take the stuff away from market. Or, they form a new contract and sell in order to get it off their books.
Sure, but when they buy the futures those products are off the market. If speculators buy up everything via futures then that will drive prices up and they'll be able to dump it at a profit (well, the ones who get out in time will).
>Do you have a reference for this?
Here is a jumping off point [1]. Oh, and I was wrong. It's 100 to 1, not 10 to 1. From the wall street point of view they didn't even find this fact controversial. In the inquiry they just basically responded with "oh, no it's fine. You just don't understand". Right, never heard you say that before...
Trying to view things as “late stage capitalism” isn’t a good way to really understand anything. It’s a cynical Reddit trope that assumes malice from the start, which doesn’t leave much room for a real explanation.
The reality is that trading like this is a type of contract and it takes two parties to enter into the contract voluntarily. Nobody is forced to trade energy contracts this way, but it can be helpful for both parties to do things like lock in more predictable pricing, hedge certain types of risks, and agree to mutual contracts that benefit both parties’ businesses.
Energy prices going negative sounds like something evil or malicious or “late stage capitalism” to the uninitiated, but even without trading errors there are legitimate reasons to have negative energy prices at certain times of day. For example, certain types of power plants like nuclear can’t quickly ramp up or down as demand changes. A power company might come out ahead by pricing power negative (that is, paying people to consume it) for certain night time hours if it allows them to keep the power plant at a higher, continuous output in preparation for peak times. Energy hungry industries such as aluminum manufacturing or other industrial processes might gladly adjust their production schedules to operate during these times to take advantage of the low or negative pricing. Everybody wins.
There are numerous dynamics like this at play. It’s not a “late stage capitalism” thing, despite how some people like to sneer at anything they don’t understand. There are legitimate reasons to operate this as a market and let market participants work out optimal deals.
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