The losers in this "bezzle" (J K Galbraith's wonderful expression for when the losers don't know they are losing)are the "end users" who use markets to "hedge", and small time traders without the access to information the big boys have.. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
A real hedger doesn't lose. say you wish to buy oil next month at $50 and that's where the future is trading. You go buy your hedge. Then come the day you want the physical oil you buy at noon and then sell his hedge off simultaneously (or just does an efp -- trades oil for futures) he at most loses the bid/ask. No harm.
Some big sellers (say a Scandihooligan) sell large quantitiies of physical oil off of the IPE settles on a derivative basis. That is, they use the settle to price a physical sale without going through the futures for most of the oil. So another player(the buyer) can trash the settle with a much smaller quantity and gain a profit. The problem is letting the other side have leverage.
there are easy solutions to the problem
Thanks, exactly what I wanted Chris to ackowledge. "It's the statue, man, The Statue."
But the real hedgers don't have the advantages of the guys sitting in the middle in terms of access to data and order flow.
And if a Big Oil company is in cahoots with a Big Investment Bank - a not unlikely scenario - then other market players can get doubly screwed.
All you have to do is:
(a) add up the profits made by Goldman Sachs, Morgan Stanley energy desks - not to mention BP's trading profits - and ask yourself why the top people in the Banks got where they did; and (b) why every other investment bank is queuing up to poach energy teams from their competition; and (c) why star energy traders head for hedge funds, because they don't see why their employer should get so much of the profit THEY are making; and the $64 billion question (d) at whose expense are these multi billion "super-profits" (I don't begrudge trading profits, by the way) being made?
The answer to that is hedging "end user" producers and consumers, and, increasingly, hedge funds. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
I'm not sure what you are getting at with your heldging comment, but people are hedging everyday on many transactions simply because they want to take financial risk out of their life--farmers, business people, investors. If you want to lock in a payment being made to you in Euro's in 6 months, lock it in in dollar terms because you are a US citizen,,you can do that--and not worry about hoping the Euro is still worth the same as today in 6 months. On the other hand if you think the euro will be stronger and you want to take that risk, you can just wait and see what happens. to me, it's all about having those choices--and it's certainly been a good thing for me in the past.
The stock markets are not as black as you see them based on your exposure to a much uglier commodity market where players are assumed to be expert and have their eyes open. For example, commod players are not only allowed but are expected to be trading based on info not widely known in the market. That's illegal in the stock markets. If your company is about to announce a new product, it cannot do a big stock buyback the day before. If your refinery is burning, you can buy like hell if you can move faster than the others.
Real hedgers have opportunity to avoid game playing, they just have to not get talked into badly designed instruments/strategies marketed by exchanges like the IPE.
