IPMI 2009-How Changes in the Marketplace affect your business

NOTE: The notes I have added for the slides are an idea of what the presentation was about. I had afterwards fine tuned it and added other commentary at the actual live presentation.


















Session Goal
• Identify the original structure of the marketplace
• Identify the change that have occurred over the recent past
• Discuss the changes and how they affect business in general
Trading past
• Agreements/Contracts between individuals or business (also called OTC)
• There was no transparency on pricing or history
• A trader was someone who had the ability to be party to a transaction
• Some long term agreements, but mostly cash on business
• Tulip Frenzy of the 16th Century
The Exchanges
• First official trading pit to open Chicago Board of Trade over 150 years ago
• Regulations were soon to follow due to market manipulators
• Grain Futures Act of 1922 first to require exchanges to keep track of historical prices, commodity production and suppress false reports.
• Self regulation of contract specifications
How they work
• Active contractual future months
• Margin sometimes called good faith deposit
• Floor brokers and speculators added liquidity
• Hedgers benefit from increased liquidity but often decried manipulation against them
• Floor Traders were mostly members
• Clearinghouse Principal driver of business
• Self regulation through the NFA (National Futures Association)
• Federal Regulation 1974 (Commodities Futures Trading Commission)
Over the Counter
• Market maker or counter party makes prices
• Prices are not publicly recorded
• Contracts are not transferable
• Specifications are agreed between the two parties
• Contract date can be set for any specific time
• Little regulation except for contract law
The Good
• Live market data feeds internet based give hedgers, traders and consumers instant access to prices (transparency)
• Domestic and Global economic data is knowable through the same systems instantly
• Better organized markets increase liquidity and drive volumes traded higher
• Even the smallest players can enter the market place through many “mini” contracts

The Bad
• Electronic markets enable programmed computers by “Quants” to trade on algorithmic mathematical models instantly adding volatility.
• Easy money- banks lend Funds and Investment houses the margin money to trade and give them the greater leverage. (because banks and brokers are now almost indistinguishable)
• Regulations were weakened in the banking sector – OTC markets where trading bad paper caused the beginning of our current crisis
• No traders have vested interest in the exchange
The Ugly
• The Media like to promote anything that drives interest (Its not their fault they do it for a living)
• Mob rules mentality, so many small participants jump on the band wagon
• Fundamentals ignored for market hype
• Certain Investment money does have the potential of influencing market direction
The Great Con Job
• Hedge Funds have all the answers
• The stock market is the safest place to be
• Real Estate always goes up; they are not making any more of it.
• China is consuming everything
• We will soon be out of Crude Oil
• Platinum group metals are in short supply
• Hyper inflation is soon to come
• Large Funds in small markets don’t affect the prices

Damages
• Commodities prices explode, industries suffer major losses, e.g. Auto industry
• The consumer stops buying
• Industry over hedges at astronomical prices examples: Pt, Ru, Rh, Ag charts
• Stock prices on some industry collapse on commodities loses causing loss of credit
• One bad effect leads to the other
Gnosis
PT Barnum once said “that a sucker is born every minute”. But in the end it is not true. What is true is that most people believe that someone else knows better. Or that it must be a good investment because Mr. Big Shot has his money there. That belief is what causes so many to put their trust in people rather than work it or earn it themselves.
The Tools
• Market data
• Historical Prices
• Commodity Mine production, stock and current demand
• Talk to physical traders
• Overall economy
• Watch out for market hype
• Take into account investment money influence
Judgment Call
• While the government pumps money into the system they do nothing to correct the problems which caused the sickness
• Industry needs to protect itself by the wisdom of practicality.
• Short term vs. Medium & Long Term
• Capital investments versus market investment
• Sometimes the best trade made is the one you backed out on.