Showing posts with label financial markets. Show all posts
Showing posts with label financial markets. Show all posts
Friday, June 1, 2018
Will Trump Help Us Profit From the Jobs Numbers?
Today, President Trump tweeted around 7:24 am that he was "looking forward" to the jobs numbers. Some traders in the financial markets apparently saw this, sold Treasuries, and bought stocks. When the jobs numbers came out at 8:30 am, they were better than expected. Jobs increased by 223,000, about 33,000 more than economists had estimated. https://nypost.com/2018/06/01/how-trumps-pre-jobs-report-tweet-moved-the-market/. The stock market rose more than 250 points in morning trading. Whoever bought stocks before the jobs report made money--good money.
It turns out the President learned the jobs numbers last night. The federal government, including the White House, has historically refrained from any comment on the jobs numbers until they are officially released at 8:30 am. The President broke with tradition. Whoever among financial markets aficionados were monitoring the President's Twitter address got an advance hint about the jobs numbers. It's implausible to think the President would have tweeted if the jobs numbers had been tepid or discouraging. His "looking forward" comment could only mean the numbers would be good.
Trump shouldn't have tweeted about the jobs numbers before they were officially released. But it's just in his nature to keep his mouth moving and the Tweeter going. So maybe this gives us a way to make money from the jobs numbers. If the President tweets about jobs before the official release, invest in a way that would profit from good numbers. If the President is silent before the official release, invest in a way that would profit from tepid or bad numbers. Will this work? No guarantees, but you never know. Maybe you could make a nickel or two.
Friday, December 8, 2017
Bitcoin Futures and the Growing Systemic Risks of Bitcoin
Yesterday, Bitcoin rose above $19,000, only two days after it reached $12,000. Then, it plunged some 20%. As we said before, Bitcoin is in a bubble. And things will get riskier soon.
Next week, on Dec. 10, 2017, Bitcoin futures contracts will begin trading on the Cboe. On Dec. 18, 2017, they will begin trading on the CME. Both the Cboe and CME are longstanding exchanges that trade many well-established financial products. The commencement of Bitcoin futures trading lends Bitcoin a legitimacy it doesn't yet have. Investors who may shy away from the little known, often foreign markets where Bitcoin is currently traded could be drawn to the Cboe and CME because they are well-known, located in America and regulated by the U.S. government. American investors may become far more exposed to Bitcoin than they are today. And that could be bad.
The underlying Bitcoin market is opaque, to say the least. Much of it is overseas, and reliable transactional data is scarce. Ownership information is, by design, unavailable. How does one price a futures contract when one doesn't have a good idea of what's happening in market for the underlying asset?
The Bitcoin futures market will also differ dramatically from Bitcoin in another aspect. There is a limit on the number of Bitcoins that can be created: 21 million. There is no limit on the number of Bitcoin futures contracts that can be created. People who don't want to pay or mine for Bitcoins can trade futures instead. Since futures contracts can be purchased on margin (i.e., with money borrowed from a brokerage firm, after putting some cash down as collateral), it may end up being cheaper and more potentially profitable to trade Bitcoin futures instead of Bitcoins. The volume of Bitcoin futures trading could end up dwarfing the volume of trading in the underlying Bitcoins. And there is no limit on how large the futures market could become.
If Bitcoin futures trading expands the way Bitcoin trading has ballooned, the amount of marketwide exposure to Bitcoin price movements could increase exponentially (or maybe even faster). The volatility of Bitcoin's price could wreak havoc with investors trading futures contracts, who generally buy futures contracts on margin. When the price of a futures contract purchased on margin drops, brokerage firms can ask for additional cash to be deposited as collateral (via a "margin call"). This cash has to be provided quickly or the brokerage firm may sell the futures contract to prevent further losses to itself. Investors sometimes fail to provide the additional cash demanded, either because they don't have it or can't get to it fast enough. Either way, the brokerage firm's sales then add to the downward pressure on the market. That can push the price of the futures contract lower and result in more margin calls. These in turn can produce even more selling, leading to a downward spiral. That's what happened to stocks in the great stock market crash of 1929, and it could happen to Bitcoin futures contracts.
None of this requires that the Bitcoin futures market be cornered or otherwise manipulated. It can happen from the daily craziness we already see in the Bitcoin market. If a lot of investors dive into Bitcoin futures, the aggregate risk created could be immense. Abrupt price drops such as we have recently seen (i.e., 20% a day) could be catastrophic for investors trading on margin. Widespread failures to meet margin calls can endanger the financial stability of brokerage firms and clearing houses. Some may collapse, something that happened after the 1929 stock market crash. That, in turn, could put the financial system at risk.
Of course, everyone thinks the Fed will bail us out. There seems to be an assumption in the market that the Fed has always bailed us out and always will, so risk is irrelevant. But this is no longer true, if it ever was. The Dodd-Frank Act, much detested by conservatives, limits the extent to which the federal government can underwrite financial market bailouts. There is no insurance covering market losses in futures accounts. So investors taking losses in this scenario, and their brokerage firms, are pretty much on their own.
Some might think that the way out of this dilemma is for investors and firms to hedge their exposure. That way, if the market goes bye-bye, the losses are passed to whoever gave them the hedge. But, from a systemic basis, hedges don't solve the problem. Financial risks, once created, don't go away by themselves. When they result in a loss, the loss lands somewhere. If not on the original investor, then on the person who provided the hedge (or if that person hedged the hedge, then on the person providing hedge for the hedge, and so on). No matter how long one extends the chain of hedges, the loss will land somewhere.
If those losses are concentrated into one or a few firms, the result could be seriously bad in a systemic way. That's what happened during the financial crisis of 2008, when very large amounts of derivatives market losses from mortgage-backed or mortgage-related investments were concentrated at a single large insurance company--AIG--which, had it collapsed, would have taken down the world's financial system. As things happened, U.S. taxpayers, in a ceremony M.C.'d by the Fed, bailed out AIG and the world financial system, which although gasping for breath, was able to limp along and muddle through.
Could Bitcoin futures losses end up concentrated in a way that would put the financial system at risk? That will be the challenge for financial regulators, in the U.S. and elsewhere. Since Bitcoin is traded around the world, regulators in the U.S., Europe, China, Japan and elsewhere need to be alert and communicate enthusiastically with each other. Given the astounding celerity at which Bitcoin trading has ballooned, and the jaw-dropping volatility of Bitcoin prices, there is every reason to believe that Bitcoin futures could provide a ride as wild as, or wilder than, the Bitcoin monster roller coaster. And the world may well not be prepared for what could happen.
Next week, on Dec. 10, 2017, Bitcoin futures contracts will begin trading on the Cboe. On Dec. 18, 2017, they will begin trading on the CME. Both the Cboe and CME are longstanding exchanges that trade many well-established financial products. The commencement of Bitcoin futures trading lends Bitcoin a legitimacy it doesn't yet have. Investors who may shy away from the little known, often foreign markets where Bitcoin is currently traded could be drawn to the Cboe and CME because they are well-known, located in America and regulated by the U.S. government. American investors may become far more exposed to Bitcoin than they are today. And that could be bad.
The underlying Bitcoin market is opaque, to say the least. Much of it is overseas, and reliable transactional data is scarce. Ownership information is, by design, unavailable. How does one price a futures contract when one doesn't have a good idea of what's happening in market for the underlying asset?
The Bitcoin futures market will also differ dramatically from Bitcoin in another aspect. There is a limit on the number of Bitcoins that can be created: 21 million. There is no limit on the number of Bitcoin futures contracts that can be created. People who don't want to pay or mine for Bitcoins can trade futures instead. Since futures contracts can be purchased on margin (i.e., with money borrowed from a brokerage firm, after putting some cash down as collateral), it may end up being cheaper and more potentially profitable to trade Bitcoin futures instead of Bitcoins. The volume of Bitcoin futures trading could end up dwarfing the volume of trading in the underlying Bitcoins. And there is no limit on how large the futures market could become.
If Bitcoin futures trading expands the way Bitcoin trading has ballooned, the amount of marketwide exposure to Bitcoin price movements could increase exponentially (or maybe even faster). The volatility of Bitcoin's price could wreak havoc with investors trading futures contracts, who generally buy futures contracts on margin. When the price of a futures contract purchased on margin drops, brokerage firms can ask for additional cash to be deposited as collateral (via a "margin call"). This cash has to be provided quickly or the brokerage firm may sell the futures contract to prevent further losses to itself. Investors sometimes fail to provide the additional cash demanded, either because they don't have it or can't get to it fast enough. Either way, the brokerage firm's sales then add to the downward pressure on the market. That can push the price of the futures contract lower and result in more margin calls. These in turn can produce even more selling, leading to a downward spiral. That's what happened to stocks in the great stock market crash of 1929, and it could happen to Bitcoin futures contracts.
None of this requires that the Bitcoin futures market be cornered or otherwise manipulated. It can happen from the daily craziness we already see in the Bitcoin market. If a lot of investors dive into Bitcoin futures, the aggregate risk created could be immense. Abrupt price drops such as we have recently seen (i.e., 20% a day) could be catastrophic for investors trading on margin. Widespread failures to meet margin calls can endanger the financial stability of brokerage firms and clearing houses. Some may collapse, something that happened after the 1929 stock market crash. That, in turn, could put the financial system at risk.
Of course, everyone thinks the Fed will bail us out. There seems to be an assumption in the market that the Fed has always bailed us out and always will, so risk is irrelevant. But this is no longer true, if it ever was. The Dodd-Frank Act, much detested by conservatives, limits the extent to which the federal government can underwrite financial market bailouts. There is no insurance covering market losses in futures accounts. So investors taking losses in this scenario, and their brokerage firms, are pretty much on their own.
Some might think that the way out of this dilemma is for investors and firms to hedge their exposure. That way, if the market goes bye-bye, the losses are passed to whoever gave them the hedge. But, from a systemic basis, hedges don't solve the problem. Financial risks, once created, don't go away by themselves. When they result in a loss, the loss lands somewhere. If not on the original investor, then on the person who provided the hedge (or if that person hedged the hedge, then on the person providing hedge for the hedge, and so on). No matter how long one extends the chain of hedges, the loss will land somewhere.
If those losses are concentrated into one or a few firms, the result could be seriously bad in a systemic way. That's what happened during the financial crisis of 2008, when very large amounts of derivatives market losses from mortgage-backed or mortgage-related investments were concentrated at a single large insurance company--AIG--which, had it collapsed, would have taken down the world's financial system. As things happened, U.S. taxpayers, in a ceremony M.C.'d by the Fed, bailed out AIG and the world financial system, which although gasping for breath, was able to limp along and muddle through.
Could Bitcoin futures losses end up concentrated in a way that would put the financial system at risk? That will be the challenge for financial regulators, in the U.S. and elsewhere. Since Bitcoin is traded around the world, regulators in the U.S., Europe, China, Japan and elsewhere need to be alert and communicate enthusiastically with each other. Given the astounding celerity at which Bitcoin trading has ballooned, and the jaw-dropping volatility of Bitcoin prices, there is every reason to believe that Bitcoin futures could provide a ride as wild as, or wilder than, the Bitcoin monster roller coaster. And the world may well not be prepared for what could happen.
Friday, June 19, 2015
An Epidemic of Price Fixing in the Financial Markets
Nothing is more antithetical to the principles of free enterprise than price fixing. Rigged prices undermine the efficient functioning of markets and defeat their ability to maximize economic welfare. Sadly, we've had an epidemic of price fixing in the financial markets, frequently involving the largest and most important banks.
The London Interbank Offered Rate has been the subject of governmental investigations in Europe and the U.S. for alleged years-long collusion. Billions of dollars of fines, penalties and other payments have been assessed on various big banks, and the investigation of other major banks continues. Trillions of dollars of loans and contracts were priced based on Libor, and the potential impact of this price fixing is massive.
Foreign exchange rates have been investigated for rigged prices, and billions of dollars of fines, penalties, etc. have been paid in government and private civil lawsuits. Again, some of the largest banks are implicated.
Now, word comes that the market for interest rate swaps has been under investigation for price fixing via the alleged collusive manipulation of the ISDAfix, a benchmark swap rate that is used in the pricing of a variety of financial products. The interest rate swaps market, although obscure to the general public, involves hundreds of trillions of dollars of financial products (in notional value) sold to corporations and other commercial customers to offset interest rate risk. Big banks are reportedly involved this collusion and the fines, penalties, etc. could total perhaps billions.
There are also reports of investigations of price manipulation by big banks in the metals markets. These might involve restricting supply and other maneuvers to rig prices. If wrongdoing is uncovered, more large fines, penalties, etc, can be expected.
Many of the banks involved in these matters are likely to be too big to fail. In other words, while conspiring against the public in very large and important markets, these banks enjoyed the explicit and/or implicit backing of the taxpayers. This backing helped them attain Brobdingnagian size, which in turn probably facilitated their ability to rig markets.
The financial markets are the central venue of the capitalist system, being the place where holders of capital and borrowers of capital meet to determine the allocation of society's financial resources. The largest banks are at the center of the financial markets, and their conduct ripples through the financial markets and the entire free enterprise system. That such crucially important players are so regularly conspiring against the public and the public interest presents a galling spectacle that damages the credibility of the capitalist system. Are markets truly socially beneficial or are they simply a means by which the rich and powerful fleece others?
The world's largest banks have the legal and social responsibility to refrain from such reprehensible conduct. However, their sad record of massive, multi-market price fixing seems to tell us that their chances of upholding these responsibilities aren't very high. Their collusive activities often arise in markets that have a bi-level structure: an inner inter-dealer market where the big banks and other financial firms trade among themselves, and an outer market where the dealers trade with the public at usually marked up prices. The inside inter-dealer market is a perfect venue for price-fixing, as the dealers have to talk and trade with each other every business day. As Adam Smith put it in The Wealth of Nations, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices."
Thus, the challenge falls on regulators and law enforcement authorities to be vigilant and firm. The sheer magnitude of the wrongdoing, as demonstrated by the billions that have been paid out to date, is astonishing. Those who may seem paranoid about the financial markets have it right--way too often, the markets are rigged.
The London Interbank Offered Rate has been the subject of governmental investigations in Europe and the U.S. for alleged years-long collusion. Billions of dollars of fines, penalties and other payments have been assessed on various big banks, and the investigation of other major banks continues. Trillions of dollars of loans and contracts were priced based on Libor, and the potential impact of this price fixing is massive.
Foreign exchange rates have been investigated for rigged prices, and billions of dollars of fines, penalties, etc. have been paid in government and private civil lawsuits. Again, some of the largest banks are implicated.
Now, word comes that the market for interest rate swaps has been under investigation for price fixing via the alleged collusive manipulation of the ISDAfix, a benchmark swap rate that is used in the pricing of a variety of financial products. The interest rate swaps market, although obscure to the general public, involves hundreds of trillions of dollars of financial products (in notional value) sold to corporations and other commercial customers to offset interest rate risk. Big banks are reportedly involved this collusion and the fines, penalties, etc. could total perhaps billions.
There are also reports of investigations of price manipulation by big banks in the metals markets. These might involve restricting supply and other maneuvers to rig prices. If wrongdoing is uncovered, more large fines, penalties, etc, can be expected.
Many of the banks involved in these matters are likely to be too big to fail. In other words, while conspiring against the public in very large and important markets, these banks enjoyed the explicit and/or implicit backing of the taxpayers. This backing helped them attain Brobdingnagian size, which in turn probably facilitated their ability to rig markets.
The financial markets are the central venue of the capitalist system, being the place where holders of capital and borrowers of capital meet to determine the allocation of society's financial resources. The largest banks are at the center of the financial markets, and their conduct ripples through the financial markets and the entire free enterprise system. That such crucially important players are so regularly conspiring against the public and the public interest presents a galling spectacle that damages the credibility of the capitalist system. Are markets truly socially beneficial or are they simply a means by which the rich and powerful fleece others?
The world's largest banks have the legal and social responsibility to refrain from such reprehensible conduct. However, their sad record of massive, multi-market price fixing seems to tell us that their chances of upholding these responsibilities aren't very high. Their collusive activities often arise in markets that have a bi-level structure: an inner inter-dealer market where the big banks and other financial firms trade among themselves, and an outer market where the dealers trade with the public at usually marked up prices. The inside inter-dealer market is a perfect venue for price-fixing, as the dealers have to talk and trade with each other every business day. As Adam Smith put it in The Wealth of Nations, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices."
Thus, the challenge falls on regulators and law enforcement authorities to be vigilant and firm. The sheer magnitude of the wrongdoing, as demonstrated by the billions that have been paid out to date, is astonishing. Those who may seem paranoid about the financial markets have it right--way too often, the markets are rigged.
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