In an email exchange on a left list, a question was asked, futures markets are filled with speculators and is bad for the health of financial markets, comment.
I was curious to understand why this was being said? The responder did not say much more than some vague commentary about how it screws up markets, prices, and stuff like that.
This is worrisome that despite futures being around for hundreds of thousands of years, we still have people getting confused about what they do and what benefit they bring to the table.
And this is from an Indian and that too a South Indian, who should know better. For example, pepper trading, futures, forwards, insurance, crop insurance, and the like have been known in South India for hundreds if not thousands of years. Futures trading made India prosperous. Why on earth do people say that India was the Golden Bird (Sone ki chriya)? It was because of advanced financial products, markets and infrastructure that the country generated so much wealth. To say this in another way, the answer was always under his nose.
(Incidentally, did you know that Ramses II had Indian peppercorns from India up his nose? So Indians have been getting up Egyptian's noses for thousand's of years and they follow them even after death.., heheheh). The Indian Ocean trading system can perhaps be said to be one of the earliest futures and trading exchanges, trading pepper, slaves, ivory, grain, camels and livestock, and so on and so forth.
Futures are crucial for the good functioning of any market because it removes the volatility of future prices by telling people what the value would be in the future expressed in today's terms. And all this in standardised terms which can be understood by all.
So I can purchase a set amount of orange juice or grain or oil or indices or what have you, at a specified price with delivery at a particular date in the future.
Of course, I do not need to take delivery of the stuff and can hedge it out, but do you see the basics of the contract? If I am a farmer, I can sell a future for my crop or if I am a bread maker, then I have security and confidence over my future supply. What futures exchanges further help is to provide more confidence in this entire process. And these markets are brilliant places where you can go to to find out what people are thinking about the future.
So no, please do not go after speculators on the futures markets. Fraud and collusion aside, these markets are vital for the proper functioning of our human society and have been functioning like this for thousands of years.
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