V.8:8 (323-324): Don't Regulate Futures Like Stocks by Howard S. Portnow

V.8:8 (323-324): Don't Regulate Futures Like Stocks by Howard S. Portnow
Item# \V08\C08\DONTREG.PDF
Availability: In Stock

Product Description

Don't Regulate Futures Like Stocks by Howard S. Portnow

Even as I write this, the U.S. Congress is considering ways in which the financial markets, and especially the futures market, may be "reformed." The main proposals being put forth are to unify the regulation of the stock and commodity markets under the authority of one regulatory body, to raise margin rates on the stock indices—a 50% margin is the amount most frequently mentioned—and to disconnect the stock and stock indices markets to prevent arbitrage. The reason for this desire to impose regulative and/or legislative changes on the markets is a widely expressed fear of the "evils" of the volatility believed to be emanating from the futures exchanges. Misunderstanding seems to be widespread about both the mechanism and function of the futures market and the causes of the problem.

The futures markets provide the mechanism by which commercial interests (institutional managers of equity portfolios, in the case of the stock indices) can assure future supply of stock and a given price and can offset other uncertainties they may face. Arbitrage brings prices into equality between markets for related items. Volatility is thought of as the variability or range of prices.

The problem perceived is that greater volatility in the futures market causes a price discontinuity between the futures and stock markets, which in turn encourages arbitrage, the ultimate effect of which is to transfer the volatility from the futures market to the stock market. The contention that prices range more broadly on the futures exchanges (even if conceded) is not the issue. That prices periodically run (or are run) beyond acceptable limits is. Actually, arbitragers reduce volatility on the exchange where prices have gone out of line. Arbitragers step in to buy or sell against the direction that prices are moving, and in so doing they act to slow the movement of prices. To be compensated for this service they take the opposite side of this trade on the related exchange. Thus, by this action they introduce the volatility that they had acted against in the first market into the related one.

*Note: $2.95-$5.95 Articles are in PDF format only. No hard copy of the article(s) will be delivered. During checkout, click the "Download Now" button to immediately receive your article(s) purchase. STOCKS & COMMODITIES magazine is delivered via mail. After paying for your subscription at store.traders.com users can view the S&C Digital Edition in the subscriber's section on Traders.com.

Take Control of Your Trading.
Professional Traders' Starter Kit
All these items shown below only $299.99!
  • 5-year subscription to Technical Analysis of STOCKS & COMMODITIES, The Traders' magazine. (Shipping outside the US is extra. Washington state addresses require sales tax based on your locale.)
  • 5 year access to S&C Archive
  • 5 year access to S&C Digital Edition
  • 5-year subscription to Traders.com Advantage.
  • 5-year subscription to Working Money.
  • Free book selection.
  • Click Here to Order