Commodity markets.

1. Commodities get creamed on China news. One story making the rounds is that JPMorgan and HSBC are big-time short silver futures and the squeeze is on. Apparently GS is long precious metal futures. As they duke it out there is the usual furore about manipulation in commodity futures.  Usual because people have been saying this since the 18th century and there is simply no evidence to support such a hypothesis. Speculators may (and do) try to manipulate prices, the evidence is just simply that they don’t succeed. 

Generally, the volume of commodity futures traded is far smaller than the underlying asset. More importantly, the volatility of prices for commodities with no futures markets (rice, apples) is about the same as those where there is a commodity market. What is more likely is that the price moves reflect demand in the BRIC countries.

Do not confuse manipulation with volatility. There is volatility, but that is what hedgers are trying to protect against. If you are a hedger, don’t you want a speculator to take the other side of your trade? The key though is that as long as hedgers design hedges correctly, they should be better off.  The examples we were playing with in the 427 class make a very restrictive assumption-that hedgers can find a futures contract that expires exactly at the time they want to take or make delivery in the spot market. Matching maturities in this fashion is more accident than reality and designing hedges correctly is far easier said than done.  Hedges can blow up too and big time. You need to look no further than Fannie and Freddie and their hedges against interest rates. But that is a coming attraction!