Casino Bankers more important than GDP?

grizzly1911

Perhaps the example you used, or the context in which it was used wasn't the best one.

NB:- We are seeing a weekly half hour "wildlife" program here about https://www.kangaroosanctuary.com/. does it get any coverage over there?

Loughton_Monkey

Generali wrote: »

Yes it would. The price would very likely fall rapidly.

There still wouldn't me more shares bought than sold though.

My original point about FTSE100 was a little bit more esoteric.

We're all fully aware that small blips in any individual share can be caused by a specific action or huge sell-off....

But it's more about the derivative of FTSE100. There is no "share" that you can buy in FTSE100. It is purely a number calculated from the price at any one time of 100 unconnected companies.

So trading in the FTSE100 is "gambling" on a number that has a "real" origin. Hence the word "derivative". Or put another way, when trading, something is changing hands, but not the share itself. All share holders (like me) are sitting at home, sipping their gin & tonics, with share certificates filed in the cabinet as always.....

When you read up about it, you are told that things like CFD's and Spread Betting derivatives are 'safe' because they are backed by "real" shares that are "borrowed". Anyone know if we can rely on this? As a shareholder, I have never been asked if I want to "loan" my shares. When these little back-room spotty lads with bonuses zap their joysticks and plonk £30 million worth of "FTSE100" derivatives into the market [because of the expiry of a put option or something], which are then soaked up by other spotty lads with different bonuses in different trading rooms (maybe next door), I find it difficult to believe that £30 million of shares in 100 FTSE companies have been 'borrowed', 'syndicated' [or packaged, or whatever the word is], sold, bought, and then 'paid back to their rightful owners..... all in one tenth of a millisecond....

.... and during that millisecond, the price in all FTSE100 companies tumbled by 0.3%, thus wiping £billions off the value of real companies in that short time.

One gets the feeling that someone is being ripped off here.... and it's probably not the little spotty lad who zapped out £30m of derivative instruments, nor the other spotty lad who soaked them all up. I cannot help feeling that both lads earned another £10K in their bonus fund, their employers earned considerably more, and they both went out last night and partied....

Does anyone know what's really going on in these back rooms? Behind the hedges....

Generali

Loughton_Monkey wrote: »

My original point about FTSE100 was a little bit more esoteric.

We're all fully aware that small blips in any individual share can be caused by a specific action or huge sell-off....

But it's more about the derivative of FTSE100. There is no "share" that you can buy in FTSE100. It is purely a number calculated from the price at any one time of 100 unconnected companies.

So trading in the FTSE100 is "gambling" on a number that has a "real" origin. Hence the word "derivative". Or put another way, when trading, something is changing hands, but not the share itself. All share holders (like me) are sitting at home, sipping their gin & tonics, with share certificates filed in the cabinet as always.....

When you read up about it, you are told that things like CFD's and Spread Betting derivatives are 'safe' because they are backed by "real" shares that are "borrowed". Anyone know if we can rely on this? As a shareholder, I have never been asked if I want to "loan" my shares. When these little back-room spotty lads with bonuses zap their joysticks and plonk £30 million worth of "FTSE100" derivatives into the market [because of the expiry of a put option or something], which are then soaked up by other spotty lads with different bonuses in different trading rooms (maybe next door), I find it difficult to believe that £30 million of shares in 100 FTSE companies have been 'borrowed', 'syndicated' [or packaged, or whatever the word is], sold, bought, and then 'paid back to their rightful owners..... all in one tenth of a millisecond....

.... and during that millisecond, the price in all FTSE100 companies tumbled by 0.3%, thus wiping £billions off the value of real companies in that short time.

One gets the feeling that someone is being ripped off here.... and it's probably not the little spotty lad who zapped out £30m of derivative instruments, nor the other spotty lad who soaked them all up. I cannot help feeling that both lads earned another £10K in their bonus fund, their employers earned considerably more, and they both went out last night and partied....

Does anyone know what's really going on in these back rooms? Behind the hedges....

Ok, I'll try to explain this as I understand it.

What is being traded here are futures. A future was the obligation to buy or sell a particular asset at a particular price on a particular date. Now what happens is the contract obliges 'cash settlement' so at the moment the future expires, the parties will look at how much profit or loss the contract has made and settle up in cash.


These futures are written by brokers and sold in return for a commission. They'll typically charge a pound or 2 per contract.

So what's on the other side of the trade? Sometimes just another futures contract: if I'm a broker who's sold a futures contract, I can hedge that simply by buying one of someone who's selling. If I do that I'm acting as a traditional broker, a person that brings together a buyer and a seller in return for a commission just like an Estate Agent. However there may be an imbalance between what I've bought and sold To some extent a futures broker has to act as a market maker as well as a traditional broker.

In that case I'd look to hedge myself. So how to do that? I'd buy a basket of shares that replicates the FTSE100. If I wanted to hedge 100 contracts I'd buy 748 shares of HSBC, 631 shares of Vodaphone, 489 shares of BP, 9 shares of Sports Direct, 21 shares of William Hill and so on.

When the contract unwinds, I'd sell my hedge with the P&L on my futures contracts being offset by my equity holdings.

Fundamentally, these futures are underpinned by real assets and will move in tandem with them. If they don't then any difference will simply be arbitraged away.

Think about it. If I can buy a FTSE100 future for 6000 and the underlying index is trading at 6500 then I can simply buy the future, short sell the shares and lock in a profit. Similarly, if the same future is trading for 7000 and the underlying index is at 6500 I can sell the index and buy the shares.

Obviously it's a bit more complicated than that because there's the 'cost of carry' (the fact that I have to pay interest on borrowed money and receive interest on long cash positions), there's dividends to account for, counterparty risk and other stuff but there are people who look to make money doing exactly as I describe above.

grizzly1911

Generali wrote: »

Ok, I'll try to explain this as I understand it.

What is being traded here are futures. A future was the obligation to buy or sell a particular asset at a particular price on a particular date. Now what happens is the contract obliges 'cash settlement' so at the moment the future expires, the parties will look at how much profit or loss the contract has made and settle up in cash.


These futures are written by brokers and sold in return for a commission. They'll typically charge a pound or 2 per contract.

So what's on the other side of the trade? Sometimes just another futures contract: if I'm a broker who's sold a futures contract, I can hedge that simply by buying one of someone who's selling. If I do that I'm acting as a traditional broker, a person that brings together a buyer and a seller in return for a commission just like an Estate Agent. However there may be an imbalance between what I've bought and sold To some extent a futures broker has to act as a market maker as well as a traditional broker.

In that case I'd look to hedge myself. So how to do that? I'd buy a basket of shares that replicates the FTSE100. If I wanted to hedge 100 contracts I'd buy 748 shares of HSBC, 631 shares of Vodaphone, 489 shares of BP, 9 shares of Sports Direct, 21 shares of William Hill and so on.

When the contract unwinds, I'd sell my hedge with the P&L on my futures contracts being offset by my equity holdings.

Fundamentally, these futures are underpinned by real assets and will move in tandem with them. If they don't then any difference will simply be arbitraged away.

Think about it. If I can buy a FTSE100 future for 6000 and the underlying index is trading at 6500 then I can simply buy the future, short sell the shares and lock in a profit. Similarly, if the same future is trading for 7000 and the underlying index is at 6500 I can sell the index and buy the shares.

Obviously it's a bit more complicated than that because there's the 'cost of carry' (the fact that I have to pay interest on borrowed money and receive interest on long cash positions), there's dividends to account for, counterparty risk and other stuff but there are people who look to make money doing exactly as I describe above.

Occasionally they get caught with their trousers down when hubby comes home I presume?

Loughton_Monkey

Generali wrote: »

.....What is being traded here are futures.....

These futures are written by brokers and sold in return for a commission. They'll typically charge a pound or 2 per contract.

Understood. Even futures are 'derivatives'. Gambling in other words.....

Generali wrote: »

So what's on the other side of the trade? Sometimes just another futures contract: .....

Probably

Generali wrote: »

When the contract unwinds, I'd sell my hedge with the P&L on my futures contracts being offset by my equity holdings.

Understood. So you're "break even", but less expenses. So isn't full hedging like that a waste of time?

If I think markets are going down, I'll short. If I think they are going up, I'll buy. Win or lose. But if I buy with one hand, and short with the other, I'm down by "expenses". Small margin, agreed, but a loss all the same.

Can understand "Pairs Trading" where you buy Tesco and sell Sainsbury. That's a 'safe' or 'non volatile' bet that simply says Tesco will do better than Sainsbury. You won't lose your shirt even if the retail food market crashes or zooms up.

Generali wrote: »

Fundamentally, these futures are underpinned by real assets and will move in tandem with them. If they don't then any difference will simply be arbitraged away.

Underpinned! Yes. That's to some extent one of my worries. Are they? How is stock actually "lent" or "borrowed". Who is lending out all my shares? And why aren't I being paid for doing it?

Or are you telling me there's a little fat man with a cigar and dark glasses sitting in a corner of EC1 buying £30K of Tesco, £40K of Persimmon, £50K of HSBC shares... puffing away at his cigar and charging decent money to lend them out to some spotty lad at Barclays Investment Bank every time he needs them to create a hedge?

Generali wrote: »

Think about it. If I can buy a FTSE100 future for 6000 and the underlying index is trading at 6500 then I can simply buy the future, short sell the shares and lock in a profit. Similarly, if the same future is trading for 7000 and the underlying index is at 6500 I can sell the index and buy the shares.

Understood. But as above, surely this is a bet that can only win £X million on the left hand, and lose £x+0.1% on the right hand?

Generali wrote: »

Obviously it's a bit more complicated than that because there's the 'cost of carry' (the fact that I have to pay interest on borrowed money and receive interest on long cash positions), there's dividends to account for, counterparty risk and other stuff but there are people who look to make money doing exactly as I describe above.

Well you're not saying anything I haven't heard, but it surely has to be deeper than that? I can currently only think of derivatives as "bets". I've just won £300 this evening by the way (Abbey Clancy on Strictly Come Dancing) online with William Hill. All I can be sure of, though, is that William Hill is "up" across the whole Strictly piece. Because of their "charges" [in equivalent terms to share trading].

We all understand the concept of the bookmaker in the middle always winning. But buying and shorting at the same time cannot be profitable? The whole constituency of punters lose between them.

And also, back to my main point, even if this whole 'issue' was Spotty Lad 1 and Spotty Lad 2 having a real gamble.... i.e. one's effectively long, the other's effectively short..... then when the game's up, yes, the'd wind up the contracts and everything's evened up again.... Just can't see why "The Market" [that's just you and me with our shares and pension funds] having 0.3% of our total investments wiped out by two spotty lads.

Surely my shares (and yours) - as innocent bystanders - should have seen no movement, even though Spotty lad 1 "won" £70 million, and Spotty lad 2 "lost" £70 million. Unless the trades were so big that "Fat man with cigar" in the middle creamed off £100 million in commission....

I'm a cynical old sod at the best of times, and generally understand the markets, but I can't help thinking there's some skullduggery somewhere between the two spotty lads and the fat man with the cigar.....

For example.....

Spotty lad 1 and Spotty lad 2 both work for Loughton Monkey Investment Trading Plc. I tell Spotty lad 1 to buy £1 billion FTSE. I tell Spotty lad 2 to short £1 billion FTSE. Fat man with cigar (who also works for LMIT Plc - indeed could be me, but I'm not fat!) makes a couple of million on the side. [Although I'm even more cynical. I'm thinking that they just "invented" a new derivative of "Buy FTSE" and an equally new "Sell FTSE" that is a product of their own making, the net result of which is "zero" and thus requires no 'underpinning'.]

Now we all go down the pub for a large gin & tonic and watch the markets. For the next 3 months. Or until there is significant movement one way or the other. We wait until FTSE has gone up by a decent amount (or down. Doesn't matter). Assume up, so we've made £100 million one way, and lost £100 million the other.

Now, with absolute precision, we go back to the office. Spotty lad 1 [who is in profit] zaps his whole parcel of shares - £1.1 billion - into the market. Sell, sell, sell. Spotty lad 2's computer is watching the price go down. About 4 milliseconds later, when the price has gone down by a mathematically calculated amount, Spotty lad 2's shorts are bunged onto the market at a much reduced loss. Only £70 million instead of £100 million if he'd sold at the same time.

Voila! £30 million made on the turn.

Large Gin & Tonics all round......

Back down the pub.

Or am I being too cynical?