Zero Hedge gets it wrong… again.

I get it, the world is ending and no one is making money.  If Tyler Durden and his readers want to believe that, please do.  To each is own but where the line needs to be drawn is misleading and false conclusions.

The CFTC has just released two new reports looking at volume in various commodity futures and confirming what most have already known, namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes.

What is a Large Trader?  A Large Trader is required to report their net position once it has been exceeded.  This helps to prevent anyone from cornering the market and also helps mitigate counterparty risk.  To see a complete list of reporting levels click here.  For example, the reporting level for the S&P 500 (Bigs)  is a position of 1000 lot or larger.  In dollars terms that is $25K a tick or $250k a handle. (Pit is $25 a tick, $250 a handle per one lot). Besides requiring significant capital it is almost always better that the rest of the market place does not know your position.  There is significant exit risk once your position becomes a large part of the market.  Considering the requirements and the migration to electronic trading I do not see how it is a very significant point.  We all wanted decentralization and regulation right?

The CFTC’s Gary Gensler said that “The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures- combined positions. The balance of trading is due to day trading or trading in calendar spreads.

The truth of the matter is that speculators can only have a short term effect on a market and according to this stat their effect is  intraday.  If there is something to create red flags about it would be that 20% of the volume controls the price but I am not sure if that is a good number or not.

This is bad news for the hedging departments of commodity firms which deal with actual physical, and thus try to hedge price swings, as long-term price expectations are largely moot when attempting to predict short and medium-term price fluctuations. In fact, bets, even correct ones, may ultimately add to price volatility if caught in a wrong-way position that faces collateral requirements.

The reason for hedging a commodity is so you know what it costs to produce your good or to sell it later.  Of course you want to buy the low/sell the high in the contract but the main purpose is to lock in a price.  If you need to get it at a certain price you risk not getting that price just like every person in any market place from the beginning of time. Once again, if 80% of volume has zero effect on the direction of the market it is other hedgers that control price over the longer term.

There needs to be a healthy ecosystem and relationship between hedgers and traders.  That starts with traders keeping other traders in line or more two sided analysis by the hedgers.

Source: http://www.zerohedge.com/article/daytraders-account-over-90-volume-price-formation-es-crude-gold-and-silver-futures

We would really appreciate your feedback, if you like, hate, or think we are full of crap. Please leave a comment, a voice mail (312) 725-9121, email info @ traderhabits (dot) com or twitterstocktwitsyoutube and facebookSubscribe to Traderhabits by email or to newsletter.

  • In other news, Texas was hot today.

    • Hilarious but unfortunately true. 

  • more interestingly, the data accidentally proves that JPM and the rest of the Silver Mafia’s famed “evil empire” are NOT the one influencing the price of silver on a daily basis by dominating trading volumes!

    sadly, I only saw ONE commenter in that ZH thread who spoke up about the absurdity of it – to me that’s always a good measure of the message board mania – how much pushback there is on inane articles.

3 Responses to Zero Hedge gets it wrong… again.

  1. steveplace says:

    In other news, Texas was hot today.

  2. Kid Dynamite says:

    more interestingly, the data accidentally proves that JPM and the rest of the Silver Mafia’s famed “evil empire” are NOT the one influencing the price of silver on a daily basis by dominating trading volumes!

    sadly, I only saw ONE commenter in that ZH thread who spoke up about the absurdity of it – to me that’s always a good measure of the message board mania – how much pushback there is on inane articles.

The services and materials provided should not to be interpreted as investment advice, an endorsement of any security, commodity, future, or personal investment advice, or an offer to buy, sell, hold or trade futures, options or commodity interests or a recommendation to buy, sell, hold or trade futures, options or commodity interests. You assume the entire cost and risk of investing and are solely responsible for any and all gains and losses, financial, emotional, or otherwise, experienced, suffered, or incurred by you.

Read previous post:
Getting ran over by the bull and eaten by the bear.

There were many times when I continued to sell into a ferocious rally and times when I bought breaks when...

Close