My lord the man has problems understanding markets, doesn\’t he?

Ritchie:

FT.com / Currencies – Bets against the euro hit record levels.

Short-term speculators have raised their bets against the euro to record levels.

Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed speculators extended their short positions in the euro from 103,400 contracts to 113,900 contracts, or $18bn, in the week to May 7.

With complete contempt for society as we know it the markets attempt to bring down the Euro, utterly indifferent to the consequences for democracy, ordinary people, peace or anything else.

And you wonder why so many of us want hedge funds regulated?

Let’s start with defending society as we know it as the opening bid and move on from there shall we?

He gets his answer in the comments:

That’s not how futures markets work. There is an equal amount of long interest. Some people may be long but there is an equal amount of “speculation” or it could just as easily be “hedging”

To which our favourite retired accountant says:

How do you know

Why is the FT wrong?

Because of the way that futures markets work. By definition for every short speculator there must be a long speculator. For where is the short speculator going to buy his speculation from if it isn\’t from somone taking the other side of the bargain?

Think on it a moment. A short position is simply a bet. I think the euro is going to fall!

OK, great, now how can you make money out of that? Yes, that\’s right, you\’ve got to go along to someone show thinks that you\’re wrong. Someone who is willing to put their own money where their own mouth is. Someone, in short (sorry) who thinks that the euro is not going to fall. So, this other bloke, you give him some money (the premium) and if you\’re right in the bet and the euro does fall then you get some of the other bloke\’s (the long) money. If it doesn\’t fall, he keeps your money.

In an option, at least. With a future it\’s a even simpler. If the euro falls he gives you money, if it rises, you pay him.

By the very definition of it being a derivatives market there must be, by definition, as many longs as shorts.

Otherwise, who would the shorts be betting with?

6 thoughts on “My lord the man has problems understanding markets, doesn\’t he?”

  1. I left this comment in response to this bit you quote:

    “Some people may be long but there is an equal amount of “speculation” or it could just as easily be “hedging”.

    Well sort of but not really. This position the FT quotes is a ‘net short’ position, the difference between longs and shorts. The CFTC does have defined categories of ’speculator’ and ‘hedger’ and this is showing the net position of the speculators (the hedgers, by definition*, will be exactly as long as the speculators are short).

    * Not quite as there is another category – an ‘other’ (called the non-reportables). .

    ** Noting this, btw, doesn’t mean I agree with Ritchie. The speculators are providing a service to the hedgers and vice-versa.

  2. “By definition for every short speculator there must be a long speculator.”

    Correct, I have said this a thousand times – notwithstanding that there may be some artificial distinction between ‘hedgers’ and ‘speculators’.

    If there is such a thing, we would expect ‘hedgers’ to be long of the actual thing itself (Euros, for example) and hence they are the ones selling futures; by reverse logic, the [evil] speculators must be the ones buying futures and hence propping up the value of the thing itself.

    Either way, it is a mystery to me why ‘hedgers’ just don’t sell ‘the thing itself’ and have done with it.

    Ah well.

  3. Same old rhetoric. The Weimar Republic blamed “speculators” for driving the currency down too, as they ran the printing presses day and night.

    Something I realised a while ago is that the primary complaint of anti-marketeers like Ritchie isn’t that markets don’t work, it’s that they do.

  4. “If there is such a thing, we would expect ‘hedgers’ to be long of the actual thing itself”

    Don’t see why. The hedgers, as so defined, are definitely net long the futures on that market, and so its more likely (not more than that) they are net short of the underlying (the euro). Perhaps a US company who has ordered 100,000 widgets from a Eurozone company for payment and delivery in 2011?

  5. That’s the thing about markets, they won’t do as they are told. Even if it is by really, really clever people.

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