The Folks Who Sell Your Corn Flakes are Acting Like Goldman Sachs
newrepublic.com
newrepublic.com
Basically, an oil company, which knows a lot about the oil market, shouldn't be allowed to speculate in oil.
Isn't this the mandated destruction of valuable market signals?
Should we also ban car mechanics from buying and selling used cars, because their special knowledge gives them an unfair advantage?
Martha Stewart didn't go to jail for having any specialized knowledge, she went to jail because someone tipped her off that a company she was invested in was about to go south. She sold those shares to someone who had no reasonable way of knowing what she knew which is essentially a type of fraud.
And also because people think it's "unfair", like the stock market's supposed to be a game or something rather than a place that you can buy and sell stock for a price which is well-correlated with the company's prospects. :P
The ban on inside information is intended to attract capital by ensuring that stock markets are fair and transparent. If the investing public believes that the stock market is nothing more than a con to take rubes' money capital will stay away, and keep capital from flowing to productive firms.
No way - now 401ks are the only retirement savings vehicle aside from striking it rich through lottery or stocks. Guess how many people translate their investment in a mutual fund to the actual stock market shenanigans?
"Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market"
...
"Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data.[2] Nevertheless, circumstances can occur when the geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose the information; for example, if he had been hired by Farmer Smith to assess the geology of the farm."
...
"There are very limited laws against "insider trading" in the commodities markets if, for no other reason than that the concept of an "insider" is not immediately analogous to commodities themselves (corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under US commodity and futures trading laws. For example, a commodity broker can be charged with fraud by receiving a large purchase order from a client (one likely to affect the price of that commodity) and then purchasing that commodity before executing the client's order to benefit from the anticipated price increase."
It doesn't feel that contradictory for me to believe insider trading should be a illegal in equities but legal in commodities, if only because of the externalities involving trust in corporate governance, the conflicting incentives (if the CEO can short his own stock, that creates some perverse incentives). But there definitely a pro-market-signalling argument to be made WRT to the OP's article.
You should be able to buy a stock without having to ask the seller "Hey, did you just get a heads up from the CEO that this is going to tank?"
When you know something the other party doesnt, and specially if that party doesnt have access to that information, its hard to see that situation as not abusive.
The game doesnt require cunning to be profitable to all parties, and information asymmetry is a tool to profit from a zero-sum like mindset.
On the other hand, the stock market operates vastly on insider trading, because even though its a rule, its very hard to enforce.
Friedman is full of crap.
Buying or selling pressure are indication that someone thinks the market will move in a certain direction. They do not indicate which someone, why they believe that, or how confident they are in their prediction.
Thus, even if we assume all market actors are perfectly rational with respect to the information they possess (which is never true), a mere short-term price shift due to buying or selling activity, even when the quantity of the activity (units bought/sold and at what prices) is made public, does not actually give us information about the beliefs and confidences of the person buying/selling.
If I want to treat sales as information and use them to assess where I think prices are going to go, I have to have all information available about the sales. I can't even estimate other people's beliefs about the sales without knowing about what transactions they make and what their portfolio looks like.
Unless someone's got some kind of super-Aumannian probability math for applying to imperfectly rational agents of whom we have imperfect knowledge, which we can use to make reliable estimates of probability and financial value despite all those levels of imperfection.
EDIT: OW, my brain hurts, and I feel like I need to go eat an advanced probability textbook.
Buying and selling pressure don't communicate things like size very well, but its often an extremely important point that we need to consider when thinking about the health of a market.
[1] https://en.wikipedia.org/wiki/Control_fraud
[2] http://neweconomicperspectives.org/2013/07/discrediting-regu...
[3] https://en.wikipedia.org/wiki/Savings_and_Loan_Crisis
We know Twitter has filed for an IPO. Will it be good? Will it be bad? We don't know any of their financials. But insiders know.
Now, granted, they'll file paperwork to show them before people can buy, but that's (partially) due to the same thought process as 'insider trading is bad.'
Now, imagine a situation a year after Twitter IPOs: An all-hands meeting, where management tells everyone that they won't be getting their annual raises because finances are bad. Employees can exploit this knowledge, but those not in that (private) meeting cannot.
Any information asymmetry _will_ be gamed.
Say I'm Kellogg's. I make Cornflakes. I pay $x/ton for corn and I sell Cornflakes for $3 a box. Now say that due to a drought, the price I pay for corn is now 2x. I have to raise the price of Cornflakes now. Consumers don't want to pay $5 for a box of Cornflakes, and my sales drop.
But if I buy corn futures when the price of corn is low, then when it goes up those become more valuable, canceling out some of my increased supply cost, therefore my business is less exposed to risk in price volatility of raw materials.
In other words, it's for hedging.
Now, there are various ways to exploit this unethically, for example if I as a commodity trading bank, actually have control over the prices of the commodities. We're right to be concerned about that. But commodities hedging itself is a good thing for the economy and we shouldn't spread FUD about it.
In and of itself, that big food companies deal in commodities futures (call and/or put) is neither surprising nor irrational.
Things start to get scary when speculators dominate the markets for those commodities, and when commodities houses corner markets. The reverberations across various sectors of the economy would be frightening if anything went to shit at even one commodity shop.
The entire point of the free market is to provide for speculation. People buying and selling goods for real dollars where they have real risk is called 'price discovery.' It incentivizes discovery of information relevant to the market and dissemination of that information to the market via price.
Lets take the example of corn flakes, I'll be a speculator, every day I watch the corn fields, one day I see a fire start on one of a field ostensibly representing half of that year's corn, I buy corn at any price knowing it will go up because the world's supply has just been cut in half. Next week I sell all that corn and take the profit as fruits of my labour.
People who trade Wal-Mart stock will often request satelite images of Wal-Mart parking lots to estimate sales. Just imagine the ingenious ways commodities traders use to discover information about supply and demand.
Farmers are completely free to sell their corn direct to consumers, but most prefer not to because that isn't an efficient or effective way of selling. Don't blame Cargill, blame farmer John down the street who wants the best price for his corn.
Or did you mean that there is a $3 price discrepancy for peppers between the supermarket and the fruit stand?
they're about $3 in the fruit stand and $4 in the supermarket.
Cargill is a fairly interesting company and like all big and small grain companies, they hedge their inventory. Grain is a very low margin business and it is very important to protect both the company and the farmer from market volatility. This does tend to put these companies in the financial instruments business and they do tend to expand past agriculture.
disclaimer: worked for Cargill at one time and will not go into any depth other than to say the article is a bit information lite and the title is horrible, ill-informed dreck that I expect.
I looked up some links on his study:
http://www.bloomberg.com/news/2013-05-15/commodity-trader- failure-seen-as-limited-economic-risk-in-study.html
http://www.cato.org/publications/policy-analysis/inefficienc...
And secondly, http://en.wikipedia.org/wiki/Futures_contract#Origin "The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s"...
The exception is onions. Onion futures were outlawed 50 years ago for "reasons" given in this article, and onions are more volatile than oil, which is the _most_ traded, speculated-on, and manipulated commodity.
In summary, the author of this article is calling for forcible action that would hurt peoples' lives, potentially even disrupting world food supplies.
Also, Apple has really screwed up with this feature change in Safari. There's so much to like about iOS 7 but not this. I've been working with the beta since it launched and have been hoping for this feature to be reverted but it looks like it's going to production now.