Norcini is my friend, and one of the quieter but more savvy people I know in the markets. He has made his
living as an off-exchange trader for many years. The concerns he has about he viability of the markets is genuine, and of great
People forget the reasons why some markets exist, what their function in
support of the real economy is fundamentally all about.
The responsibility for this distortion of the markets, and their taxing
effects on the real economy, are the responsibility of the Congress and the
regulators. Unfortunately they have been bought by unenlightened, short term,
self-interest in a variety of ways. And the same people who bought them have
sold the public a bill of goods, and appealed to the worst of their emotions
to keep them from thinking.
And the public bears some responsibility in this for their long standing
willingness to see themselves and their fellows duped, abused, and ill-used
for the sake of some outlandishly misguided idealism or a craven selfishness.
There is nothing new or unique in this. As long as there have been markets
there have been those who would tip the scales, cheat and defraud, buy the
judges, and take what belongs to others, often hiding their misdeeds under
sanctimonious camouflage of slogans like freed and the flag.
The difference is that this time it is not our fathers and grandfathers and
great grandfathers that stand the watch on the wall, but ourselves.
This is just another nail in the coffin on the efficient markets hypothesis
and the magical power of deregulation. Order in society is the result of hard
work, sacrifice, integrity and a devotion to principles of justice. The
natural result of unbridled greed and fear is crime, injustice, and anarchy.
Gone Wild - AGAIN, and AGAIN, and AGAIN
By Dan Norcini
April 13, 2012
What more is left to say at this point other than the fact that the hedge
fund computers and their damnable algorithms have destroyed the integrity of
the US futures markets. The sheer size, extent, ferocity and volatility of
the moves that these pestilential computers are creating have rendered these
markets basically useless for what they originally came into being for,
namely, risk management for commercial entities.
Price swings of this magnitude are blowing up hedged positions put on by
commercials and other end users/merchants/processors, etc. While margins are
reduced for legitimate hedgers, they still must meet any and all margin calls
on any hedged position, whether that is a long position or a short position.
Some will say that all they need to do is to buy or sell the corresponding
physical commodity and while simultaneously lifting the hedge. That might work
fine on paper but in the real world it is a fabrication.
A cattle feedlot, a grain elevator owner/operator, a cocoa processor, a
cotton mill, etc, may or may not have the actual
product ready to sell as it is still maturing or growing in the field or may
not be ready yet to actually buy the product but they might have hedges in
place while they are waiting. So much for their hedges in this sort of
idiotically insane trading environment. Their hedges are getting blasted to
kingdom come but they must maintain the thing if it moves against them
meaning that they need cash to meet any and all margin calls.
At some point, the cost of doing so, with hedge fund running prices all over
the damn planet on a daily basis, is no longer feasible.
I am predicting here and now that unless something is done to corral these
hedge funds, the futures market is going to become useless as a risk
management tool for non-speculative entities...
Read the rest here.