FUTURE TRADING.

Hauraki Plains Gazette, Volume XXXVI, Issue 4902, 13 November 1925, Page 1

FUTURE TRADING.

STABILISING VALUES. THE OTHER SIDE. The Federal Trade Commission in its sixth report on the grain trade fails to find convincing evidence in support of the assertion by advocates of future trading tnat such trading operates as* a stabilising influence on prices. The following extracts from the. report ar,e of interest: — “It has often,been asserted by advocates of future trading, especially the large speculators and commission houses, that future trading operates as a stabilising influence on prices. But detailed statistical analysis of cast and future prices movement for many years yields no* convincing evidence of this. .The data studied do not indicate that future prices are especially stable, and the technical* conditions of future trading appear to cause some fluctuations in priceis that would not otherwise occur. “Considerable significance is sometimes attached to the question whether cash prices lead future prices or the future leads cash prices, on the theory that one market influences or controls the movements of the other. The statistical evidence available relates only to priority of price changes from day to day. So far, as this answers the question it gives a divided verdict, but with leadership preponderating for cash prices. “One of the most important anid significant facts statistically demonstrated is the downward bias of price data for' various grains, and pptions over many years show that, on the average, there is a definite tendency for the future in the earlier months of trading (perhaps, nine months ahead of delivery) to fall, shodt of the price subsequently attained just before or'ditring the month of delivery. In other words,‘the tendency of the future price is to understate the ultimate price.

“ This is, true merely in a large majority, but'by no means in all of the instances dealt with. This bias of the future market in the direction of low prices is in part explained by the weight of selling hedges during the heavy marketing period. But the prevalence of undue discounts or. the downward bias, of forecasts at other iseasons (as, for example, for wheat in the spring before the opening of the new crop year, when trades or hedges are more likely to be on the buying side) must be attributed to causes ether than hedging pressure. “The character of. recent professional speculation is suggested as one of these factors*. This bias of the future market operates especially to depress unduly the next crop options. The downward bias of the future market in large part explains the tendency of the future price to be at a discount below the cash price.

“Owing to the tendency of the future to be at a discount, the risk on hedge sales, which constitute the bulit of'hedges, is considerable. Cash and futures must come approximately together in the delivery month. If, owing to the downward bias of the future, the hedge sale of the future must be made at a discount below the cash price, , the tendency referred to is much more likely to ’ result in a lotss than if the plans were to be reversed. ,

“This, in any case, operates to make the hedge unduly costly, and may, L the discounts are sufficiently large, render the future practically worthless as a hedge. The correct use of the future market for, the purpose bf protection against less is in consequence not so simple a matter as the advocate of future trading ordinarily assumes. “Hedging must, therefore, be done skilfully, or else it contains risks tb the user of the future for this purpose that are often almost as great as the incurred in abstaining from the practice of hedging altogether, at least as regards the country grain dealer, in view of alternative methods open to him, particularly ‘to arrive’ and ‘on track’ bids.”