Monday, April 27, 2015

Monday Forum - another as you will

Today's Monday Forum is another chance to go in whatever way you like. What has annoyed you, interested you during the week? What matters are left unresolved from previous discussions? Over to you.
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20 comments:

Anonymous said...

Well, I will (politely) bite - by bringing up a quote from your post of a couple of weeks ago called, I think, "Break In Transmission".

The quote is contained in one comment to that post:

I do not trade derivatives, which incidentally have nothing to do with Forex trading. I trade news events that move the currency market. This is a 3 trillion dollar a day (yes 3 trillion) market from which through my own hard work and knowledge I attempt to extract some profit

Leaving aside my obvious belief that "trading" in exchange rate movements is very definitely a part of the derivatives* market, I'd just like to provide a pointer to a very recent post on where we are right now, and the actual size of this swamp:

http://www.silverseek.com/commentary/mother-all-margin-calls-14328

kvd

* There are many definitions of "derivatives" but this is one I both understand and use when thinking about such things: Derivatives are deals on changes in any financial quantity, such as the value of a stock, a foreign exchange rate, an interest rate, a commodity price, etc.

10:35 am, April 27, 2015
Jim Belshaw said...

Interesting, kvd. Back to you tonight.

12:54 pm, April 27, 2015
Jim Belshaw said...

Buying and selling foreign currency itself is not derivatives trading, I would have thought. There has (I think) to be a separation between the thing, the currency in this case and the attribute being traded. On your interpretation of the definition you quoted, buying and selling houses would be a trade in derivatives. If you created a market based on average Sydney house prices and then bought and sold that. you would have a derivative.

That said, and this was your underlying point. that was a rather frightening piece and could indeed be classified as a swamp.

6:44 pm, April 27, 2015
2 tanners said...

Jim, I agree with you so long as you are buying or selling one lot of cold hard cash (or eletronic equivalent) for another on an immdiate contract in the hopes of future capital gain. AFAIK nearly all currency trading haS at least a futures or options component (unlike the above) which makes it derivatives trading. This has the of enabling international trade over time, but as we have seen has become a way for folks with more confidence than ability to lose the lot.

So depending on how you trade, I agree with you. Or kvd. But not both.

The key in kvd's great definition is that it is a deal in changes (i.e. over time) not a deal on goods which will change their value (which is all trading).

7:13 pm, April 27, 2015
Anonymous said...

Polite disagreement Jim.

Buying and selling foreign currency itself is not derivatives trading

My short definition did not include the additional features:

1) Nothing is ever physically transferred; it is all 'closed out' prior to actual delivery, based upon the bet - that the currency moved in your favour - or not - for which we have invented "stop loss" positions, which are themselves highly suspect. Read the fine print.

2) Trading can be leveraged. After all - who would bother to purchase $10,000 of (pounds)UK if, for a small fee, you can purchase 10xp10,000 ? Or, as seems more usual - 100x.

The laughable belief that this sort of trading 'increases liquidity' as you yourself have stated is just too innocent for words.

And your example of houses: I can actually take posession, and live in that. The house is a physical object with consequent useage benefits. The 'promise' that you will pay me for a movement in the 'Sydney Housing Price Index' is not worth the paper it is written on - nor would it shelter me in stormy weather.

kvd

7:13 pm, April 27, 2015
Anonymous said...

- posted without the benefit of considering 'tanners words. With which I will no doubt disagree.

Or not :)

kvd

7:16 pm, April 27, 2015
Anonymous said...

'tanners, I very much agree with your post.

Short, and to the point, and with nary a 'level playing field' or 'assuming all other factors being equal' in sight :)

kvd

8:50 pm, April 27, 2015
Jim Belshaw said...

It's interesting. I take the force of 2T's comment, but my problem is that it gets you into a definition of derivatives that appears so broad as to be without meaning.

3:03 am, April 28, 2015
2 tanners said...

Now I definitely disagree, Jim. (and sorry for the length of this one, kvd)

Manufacturing is altering a good to increase its value over the cost of the inputs. Services are the provision of labour in exchange for money. Trading is buying a good and selling it unchanged in the hope of the selling price being higher than the buying price. This includes currency in my view. It is illegal to refuse cash in settlement of a debt.

Derivatives are the purchase of a promise or entitlement to buy or sell a good or a further promise at a later date. The promise can be traded, but does not constitute the good in itself or in fact anything except the word of the current holder. Trading other people's promises has rather little to do with building a car, buying and selling it, or fixing the fuel pump.

You'll note I've taken steps towards abstraction - concrete goods, services, goods and services trading but at each stage the existence of derivatives need not included. You'll also note that trading can, but need not, add value to the good traded (eg. by moving it to an area of higher demand).

While derivatives can assist mining, agriculture and trading at the very least, but I can't see how this is such a broad definition.

Quite simply put (and IMHO), in your case if you buy cash, that's not a derivative. An option is.

4:23 pm, April 28, 2015
A Trader said...

Being that I was the one who originally kicked this off I suppose I should add my 2 bobs worth (about .38 AUD) My understanding is that derivatives derive their value from some underlying instrument ie. stock share ETF etc. As the instrument gains or loses value so to does the Derivative. Derivates are highly leveraged against the value of the underlying instrument. The idea being that you do not own the "thing" that is driving the price. You are not encumbered by the T+3 rule (Trade plus 3 days to settlement) and is a more rapid liquid market. CFD's for example (Contracts for Difference) which are derivatives and are banned in the USA. They are highly risky and incur significant costs and penalties.
Anyway back to the point. Jim is correct Forex is not a derivative. It is a market in and of itself. You DO actually own the currency you are trading and can cash in at any point. You can leverage or trade with just your own currency. Forex is also used as a clearing point for central banks that channel funds into other countries. For example when a country raises its interest rates money flows in from other countries pushing up the price of the currency. Hope this clears things up.

9:53 pm, April 28, 2015
2 tanners said...

@ A Trader
I think that's my point as well. If you limit Forex to pure currency trading then it's not a derivative. As soon as options or futures are introduced then it is.

10:30 pm, April 28, 2015
Jim Belshaw said...

Just extending the argument a little, futures trading is not derivative in the sense that you are actually promising to deliver or receive something. It is again linked to the real economy.

To pick up kvd's underlying point in the original discussion on high frequency trading, a problem arises where the effects of two definitionally distinct activities are the same, an attempt to manipulate a market.

Thinking about trader's comment on the Reserve Bank interest rate changes, there is no evidence of leaks.However, what you may have is certain types of high volume activity in the instant before a decision is announced.

I am very out of touch. Are we just dealing with a market problem rather than an instruments problem?

5:23 am, April 29, 2015
Anonymous said...

11, no 12, comments now upon what the definition of "derivative" is for each of us!

It's resolved to a proposition that if you buy currency, and are prepared to take delivery, that is not a "derivative". All good then?

Now look back at my first comment in which I included a small snip from our earlier discussion - see that bit about "This is a three trillion dollar a day (yes 3 trillion)" and consider for a moment how that 3T corresponds to other figures bandied about.

1. Present US debt - a bit over 16T - i.e. we are daily trading a little under 20% of the entire US deficit.
2. Present US deficit - a bit under 0.5T - i.e. we are daily trading about 6 times the annual deficit of the US
3. Present Aus. budget deficit - maybe 40Bn? - i.e. we are daily trading about 75 times our own deficit.
4. Approximate Aus debt - 400Bn - i.e. we are daily trading over 7 times our national debt.

But it's all good, because we are trading in "actual currencies" which we are prepared to take, or give, delivery of?

Glad that's been cleared up :)

kvd

6:12 am, April 29, 2015
Anonymous said...

The other interesting fact about the size of this daily market is to consider it in terms of gold - that now much derided old fashioned base support for currency:

It has been estimated that all the gold mined by the end of 2011 totalled 171,300 tonnes. At a price of US$1,500 per troy ounce, reached on 12 April 2013, one tonne of gold has a value of approximately US$48.2 million. The total value of all gold ever mined would exceed US$8.2 trillion at that valuation.

It seems the present price is about $1350 per oz. so you work out a new figure if you wish, but just taking the above 8.2T that means we are daily trading forex roughly equal to one third of all the gold ever produced.

And fully prepared, always, to take or make actual delivery.

I see the duck walking, and that definitely sounds quack-like :)

kvd

6:40 am, April 29, 2015
A Trader said...

Sorry KVD but gold is no longer a base support for currency. This was abandoned in the 60's I think.

11:56 am, April 29, 2015
2 tanners said...

kvd knows that gold is no longer the gold standard for currency support (forgive me, I couldn't resist).

In a piece of parallel thinking, I was musing that the value of gold is still not the economic value of gold, in the sense that there are 'gold bugs' propping up the price in the same way as there are no 'iron bugs' propping up the ore market.

In terms of Jim's separation of futures from derivatives (1) You trade the futures contract, not the good, as you can trade out of the contract without ever owning the good itself (2) the contract you trade DERIVES its value from the underlying good but is not good (3) of course you may end up with the good, if you don't trade your right (to say 15 tonnes of coal) to someone else.

So 1. In futures you aren't directly trading a good 2. you are trading a derivative and 3. if it's coal futures that's probably pretty sensible in those freezing New England winters. Saves chopping wood.

3:31 pm, April 29, 2015
Anonymous said...

Trader, one thing I learned very early on in my business life was that if ever I assumed I was the smartest guy in the room, I was bound to be disappointed.

'tanners, I apologise for throwing round references to you and your family - 2T 3T 8.2T - please forgive :)

"gold bugs propping up the price"? You mean those weird people who "trade news events"? Tosh, and begosh and begorrah - it never happens. People are smarter than that.

kvd

4:44 pm, April 29, 2015
Jim Belshaw said...

In the case of futures, 2T, you can end up with the good. You cannot end up with an index.

On futures, this is a very old activity that in more recent times has brought considerable benefits to Australian farmers and graziers. I can see the economic benefits of currency or futures trading while being conscious of the risks. I cannot see the benefits of derivates trading as I would define it. Perhaps some could educate me?

9:10 pm, April 29, 2015
Anonymous said...

http://www.smh.com.au/business/comment-and-analysis/reserve-bank-must-not-get-into-the-habit-of-leaking-interest-rate-decisions-20150501-1mxzsg.html

- which left the poor DT readers to fight over the scraps, I guess?

kvd

6:39 am, May 02, 2015
Anonymous said...

Here is a link to a specific comment in a post about that 'flash crash':

http://brontecapital.blogspot.com.au/2015/04/navinder-singh-sarao-our-spoofing-hero.html?showComment=1429866474362#c8145156727703408961

I think the comment stream is worth a read, probably moreso than the post itself.

Trader, if you are still reading, may I politely ask you to explain just which "news events" you deem acceptable to base your trading on? It just seems to me that there is as much misinformation being circulated as there is reliable commentary, and I wonder how you tell the difference?

Many thanks.

kvd

11:31 am, May 02, 2015

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