Re: [Marxism] Future Currents

["Joaquin Bustelo" <jbustelo@xxxxxxxxx>]

Once again Sartesian engages in what I believe is a superficial and mistaken
economic argument:

<<In response to an often raised question as to when and where actions in
future markets caused prices in "real" "spot" markets to fall or rise
dramatically, I would direct everyone to the impacts "triple-witching hour"
when Stock options, stock market index options, and stock index futures all
expired, had on the NYSE in the 1980s,.>>

First, background. What this is about is the on-again, off-again discussion
about oil prices. To simplify, there are two sides (omitting the nuances
held to by various comrades, including myself): one says it is speculators
and oil companies arbitrarily and mysteriously manipulating prices through
the futures market; the other that price rises are basically due to supply
and demand -- demand has been rising, overall output has been stagnant for
nearly four years, thus the price has risen to restore supply-demand balance
to the market by pricing some of the demand that existed at $30 a barrel out
of the market. 

At the heart of the dispute is the oil futures market. Some maintain the
market price for the physical commodity (the "spot" price) is being dragged
up by highly leveraged speculation in the futures market. I've been
maintaining that this isn't possible. Sartesian's latest is therefore really
a response to my side in the debate. He says in the 1980's, speculation in
stock index futures and similar instruments DID change price levels of the
underlying stocks. What follows is my reply.

One, the stock market is a purely financial market. What you are buying is
the right to a share of the future net income of the company involved, in
other words, the stock market itself is already a kind of "futures market."
Stocks in and of themselves have no use value. There is no market for stocks
outside the financial sphere. Thus I question whether the impact of "triple
witching" in the stock market really has much relevance to discussing
markets for physical commodities. That's because "owning" the index contract
or owning the individual stocks in the index are pretty much interchangeable
positions. That was the basis of the arbitrage -- there was a price
difference, and as computer programs massively purchased stocks in the
indexes to take advantage of the price difference, this would drive further
price changes which then could be arbitraged by more index future trading
and so on.

You can actually DO that sort of thing ALSO with a physical commodity. If
people are willing to pay MUCH MORE for next-month delivery of 1000 barrels
of oil than the oil can be physically bought for just as the future
contracts for that next month are about to expire, you CAN make a killing by
buying the physical on the spot market oil and keep and open position to
physically deliver at the higher price. That is why as contract expiration
nears, the futures price or a barrel converges with the spot price. 

This sort of arbitrage isn't a major activity because a) you can't buy and
sell very large quantitities of physical barrels of oil almost instantly so
as to take advantage of minute price fluctuations; b) transaction costs and
those associated with the physical commodity (like storage for a week and a
half before you can deliver) make that sort of "futures-driven" change in
the spot prices of a physical commodity market marginal, at most. But at
bottom this is what keeps the futures market "honest." {I discuss this in
more detail in another post).

In the 1980's, the rise of computerized trading led to an explosion in
arbitrage (taking advantage of unjustified price differences between related
"products," like plain old stocks and futures contracts for an index
composed of lots of these stocks). This made "triple witching" hours very
volatile, hence the name. And coverage of this became a cliché of cable
news, with its constant tendency to hype random and meaningless events, like
wild swings of stock prices as these computer programs bought and sold index
futures and index component stocks. 

With the bursting of the stock market bubble, the "war on terror" replaced
the stock market on cable news, so much so that Sartesian seems to be under
the impression that triple witching stopped occurring some time ago. Not so.
The contracts still expire the third Friday of the month that ends a
quarter. But advances in arbitrage programs and changes in the futures
contracts have made those days less volatile, even though now there are also
individual stock future contracts, which did not exist in the 80's, so it is
really "quadruple witching".

However, if considered applicable to the market for crude oil, the example
of "triple witching" from the 80's doesn't seem to say much except that you
can mess things up if you let technology get ahead of your market rules. But
this is just instability and volatility, 

As has been demonstrated pretty convincingly (see the book, A Random Walk
Down Wall Street), day-to-day stock price fluctuations are simply "noise."
What you read in the New York Times or Wall Street Journal or hear on TV
about why stocks moved the way they did is ALL FABRICATION AFTER THE FACT.
PEOPLE LIKE ME sit behind computers and MAKE IT UP. 

For example say the stock market were open today, and it went up. I would
write it was because the market was reassured by the Federal Reserve's quick
action to close two more failing banks and sell them to a third, putatively
healthier bank. But if it went down I would write that the market was
unnerved by the Fed having to close two more banks. See? 

Not only that, I could quote people on that, brokers or commentators who
would say the same thing, or wire service stories, or what financial
bloggers wrote. 

THEY ARE MAKING IT UP EX-POST-FACTO. OFTEN contrary movements based on
similar news on consecutive days is larded over with the "greed and fear"
cliche that Sartesian also regaled us with to cover up the contradiction.

But if it were TRUE that there was the asserted linkage between the news and
the outcome on the stock market, then a careful study would reveal the
pattern. Knowing the pattern, you could, in a majority of cases, place bets
on the direction of the market through futures contracts, and, within a
relatively brief period of time, the balance in your trading account would
begin to approach the sum of all financial capital in the entire world as a
limit.

Think of it this way: you're placing bets on coin tosses, heads or tails.
Except that one or two tosses out of every ten, the voice of God comes into
your head beforehand and tells you what it is going to be, and you bet
accordingly. The end result is that although heads and tails are evenly
divided over time, you are "guessing" correctly 60% of the time. Initially
you had $100, and you bet $10 at a time. After ten tosses you won six, so
you now have $120, so you bet $12 each time, and after ten more and six more
wins you have $144, and after the next round $172.80. Your winnings grow
exponentially and you soon bankrupt your opponent. 

Since this hasn't happened on the stock market, we know the
minute-to-minute, hour-to-hour, day-to-day fluctuations are random,
unpredictable, just noise, statistically speaking.

But this also has a very important implication for the stock markets
movements that are perceived as being motivated by arbitraging index and
individual stock futures and options. Taken together (summed up as a whole),
they are simply MORE noise, meaningless volatility, nothing more.

Joaquin


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