June 25th, 2006 by 
..byxbee
There are frequent references to futures and futures contracts in the financial media, but are these?
A futures contract represents a legally binding agreement between two parties to pay or receive the difference between the predicted underlying price set when entering into the contract and the actual price of the underlying when the contract expires. Index futures trade with a multiplier that inflate the value of the contract to add leverage to the trade.
from Investopedia - What do the S&P, Dow and Nasdaq futures contracts represent?
Hmmm… The orginal trading in futures during the eighteenth century was primarily used for the trading of rice and silk. The rice producer and the rice merchant both need to know what the price of rice will be when the crop is harvested many months in the future. Instead of just waiting and taking a chance on the eventual supply and market conditions later, they agree on a price now. This is a legally binding agreement and solves a problem for both parties by eliminating risks associated with an uncertain future.
This seems pretty straightforward for commodities. Some bright-light figured that if this was good for copper, coffee and orange juice, it would work for U.S. dollars, and even stocks. At the end of the contract, the purchaser expects to take delivery of “it.”
Now take this one step further. Suppose A has a contract with B to buy commodity X at the future date for a specific price but B doesn’t need X after all. No problem. Sell the contract to C. And yet another financial market is born! This works in the abstract, so this becomes legalized betting on almost anything and the Chicago Board Options Exchange (CBOE) is the center of the action.
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June 25th, 2006 by ..byxbee
We recently heard the story of a friend of a friend who invested in pennny stocks and lost all the investment. This is unfortunate, but it does happens, so it is worth looking at the internals.
There aren’t many penny stocks these days - which speaks volumes about the inflation we don’t have. The SEC has even changed the definition to include stock trading for less than $5 per share.
They are still very risky and subject to manipulation, because they fall beyond the durstiction of some regulations. better to sit down and wait for the urge to pass, than to invest.
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June 25th, 2006 by ..byxbee
Is history repeating itself? Global and economic conditions change so that the past can never be repeated exactly. That does not mean that we should ignore the lessons of the past. I really hope that nothing bad is going to happen, but I just can’t get over the feeling that the other shoe will drop sometime soon.
Looking through information about previous significant declines and depressions is facinating. If / as /when something does happen, it will be good to have a basic undertanding of the forces at work and prehaps, be better prepared to deal with the outcomes. However, there are many concepts and terms required to describe these financial histories. For example, from Wikipedia - Black Monday (1987) describing the possible causes of the crash of 1987
There were a series of volatile days that caused widespread nervousness leading up to the crash, with the market ultimately sliding downward. In late August some observers warned that technical analysis indicated the market was now in a cyclical “bear” mode. However, this view was not widely subscribed to even as the market traded wildly.
Potential causes for the decline include program trading, overvaluation, illiquidity, and market psychology. These theories might explain why the crash occurred on October 19 and not some other day, why it fell so far and fast, and why it was international in nature and not unique to American markets.
So this goes on the list of “projects” - more reading, more research to understand even these couple of paragraphs.
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- Wikipedia - Black Monday (1987)
- volatile days
- technical analysis
- cyclical “bear” market
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program trading
- overvaluation
-
illiquidity
-
market psychology
- efficient market hypothesis
- economic equilibrium
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June 25th, 2006 by ..byxbee
The article Financial Reality Program Trading warns that the current levels of program trading are way above the 12% level that likely contributed the 1987 crash.
As defined in Wikipedia - Program trading
Program trading is casually defined as the use of computers in stock markets to engage in arbitrage and portfolio insurance strategies. More precisely, the New York Stock Exchange defines a program trade as a basket of stocks having either a total value of $1M (or more) and where the total number of stocks in the basket is 15 or greater.
Program trades need to be specifically marked as such when submitted to the exchanges, and there are certain restrictions placed on programs that do not apply to non-program trades
So there is a very specific definition used in the reporting of statistics by NYSE.
program trading accounted for 69.7% of NYSE volume
Source: NYSE Program Trading Staistics
However, because this definition is fairly narrow, there are other activities that involve computer programs that don’t fall into the NYSE reporting.
Very complex computer programs direct algorithmic trading where orders are broken up into very small pieces (typically 100-300 shares per piece) and gradually submited into the market. The algoithms are so complex, that even the users don’t really understand what they do, hence “black box” - rather scarey. Add to this the ability to connect to internet trading programmatically and the consequences could be problematic. The efficiency of markets and economic equalibrium are unpredictable when there is no human intervention to provide checks and balances, ethics, crowd mentality or self-preservation.
black boxes sitting on the internet trading away as well
Financial Reality Program Trading
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