The solution to ban onion futures trading seems shortsighted. Couldn't this happen again with another type of future contract? Was there really nothing else that Kosuga did that was illegal or could be made illegal?
It seems to me that the bit justifying government intervention is the fact that the onion market was flooded and a lot of onions had to be dumped. Had it not been for the market manipulations, that would have been marketable food that wouldn't have gone to waste. The futures trading is the only reason the hoard then dump scheme made sense. Without that system helping guarantee a payout, attempting to corner the market would have been more risky with less potential reward.
Banning onion futures trading does seem like a blunt solution, and unsatisfyingly incomplete. But it's a hell of a lot simpler than trying to preserve futures trading while also eliminating the perverse incentives that led to this. And it may be that it's simply not possible to have something like futures trading without this systemic vulnerability when the market is small enough for an individual to attempt such a scheme.
> And it may be that it's simply not possible to have something like futures trading without this systemic vulnerability when the market is small enough for an individual to attempt such a scheme.
That is very definitely not true, as shown by the fact that there are many, many commodities where futures trading is allowed and nothing like this has ever happened.
In fact, the article is frustratingly incomplete concerning how it was really possible in the first place.
Because there must be something really dysfunctional in how a futures market is set up to allow this scenario.
Normally, if someone tries to buy up all the futures, the price would go through the roof, especially once people notice that that is what's happening. The scheme would fail at that point because you'd run out of money.
I also don't really understand how it was possible for the market to be flooded to the point that the produce was dumped en masse. It's not like people had produced more onions than normal or that they'd all go bad at the same time.
Something similar has happened only a few years ago, well-publicised. Many people noticed the odd pricing. Some of the people who did notice the anomalies misunderstood their cause, and decided on a course of action that didn't lead to any correction (well, except for bankrupting a few misunderstanders).
The key is that someone will notice, but that someone need not necessarily understand and act appropriately.
(What happened was that one large company bought shares, futures and options in another, which drove the price of those futures and options up. Hedge funds noticed that the futures and options were too expensive, and decided to arbitrate. When the first eventually disclosed that it had enough futures and options to acquire the second, a whole flock of hedge funds were caught with obligations to meet and no means to meet them.)
I'm pretty sure you mean the attempted takeover of Volkswagen by Porsche in 2008, but what you're writing is pretty wrong and has very little to do with the discussion about futures.
- There were no future contracts involved, at all. Options are a different thing.
- Porsche didn't need to "corner the market", i.e. buy all VW stock. They only needed 75% to gain certain supermajority rights.
- There wasn't really anyone "noticing anomalies" and misunderstanding them, or trying to "arbitrate" a "too expensive" stock. The VW stock price had been going down as a result of the financial crisis, and a number of traders had shorted it in the expectation that it would go down further.
- Porsche actually lost big in the whole affair; they never reached the 75% because they did run out of money, and the loans they had to take on to do it eventually broke their back. In the end, they were acquired by VW, not the other way round.
One would think the recent swing in WTI crude oil futures contract prices into deeply negative territory (while Brent futures remained positive) would be all the evidence a person needs to draw that conclusion...
Only if that person doesn't understand how all that works and why the current situation is an absolute extreme, and there are some pretty significant differences between WTI and Brent futures, namely in where and how they're delivered.
Onions and motion picture box office ticket receipts :)
I agree that this seems like an overly specific bugfix which won’t cut to the root of the problem. So why hasn’t this happened since then?
It might be the case that commodities markets have gotten too large for these types of corner attacks, somewhat akin to bitcoin being resistant to a 51% attack through sheer size.
This crap happens all the time on small cap stocks
One of the main subreddits for stock speculators (wallstreetbets) had to ban mentioning penny stocks or small cap companies because having all the Reddit gamblers pile into something would act like a pump-and-dump
> As the swashbuckling day trader’s imprint on the market becomes more pronounced, moderators are getting stricter in their policing of the board—or “sub,” for subreddit. One user, who’d been a member for three years without posting, laid out the bull case for Lumber Liquidators Inc. and promised another pick the following morning. Call volumes in the company jumped to 71 times the previous one-month average, with shares rising 18.6%.
The reason for this solution is pretty simple: onion farmers felt that the cause of the problem was the onion futures market and they lobbied their politicians to ban them. The politicians didn’t care and banning the futures is a much more obvious visible action than introducing some complicated regulation. It’s also faster/easier to do and looks like a stronger, more serious reaction. So the reason for the ban is that it’s what people wanted and their elected representatives didn’t have strong feelings against it.
The reason the ban still exists is pretty simple too: no one cares strongly enough to lobby to have it lifted and so it remains by inertia.
Banning onion futures was a "don't try this again or we'll take away your toys" hammer. Everyone involved now knows there is a risk that next time the authorities will act before they get to take the profits from the corner.
Yes it could happen again, it was an act of congress.
There are now two futures contracts explicitly banned in the US Code.
Onion Futures, and Box Office Futures.
The 2010 financial reform act banned box office futures are a rider. The CFTC, the regulator, had just approved them after a few years of review. It would have given studios the ability to hedge their movies flopping, and let speculators trade how much a movie might make.
The MPAA hated it, primarily because the overexcited CFTC was trying to burden movie studios with financial compliance regulations in order to launch the market.
The CFTC is the wildest regulator, other Federal financial regulators are extremely timid. But the MPAA flexed its muscle and got a ban on the second futures contract in history.
The futures market is notorious for things that are definitely illegal in other financial markets (e.g. the stock market), and every so often you will see news about the CFTC prosecuting someone for market manipulation. Banning onion futures only served as a reminder to everyone that the most extreme forms of bad behavior will not be tolerated, but plenty of less extreme but equally bad behavior is pretty pervasive. Algorithmic trading in the overnight market is rife with malicious tactics (bots try to discover and exploit stop orders, and in some cases bots are just trying to "trick" other bots).
> Algorithmic trading in the overnight market is rife with malicious tactics (bots try to discover and exploit stop orders, and in some cases bots are just trying to "trick" other bots).
What makes this malicious?
Stop orders are just another source of liquidity, and they aren’t required. Don’t place your stop order in an obvious location, like right outside the local minima/maxima.
Orders are allowed to be canceled or adjusted, I probably cancel 5-6 orders for every fill when I’m trading, algos are just faster.
Keep in mind that when price moves, it may not be obvious to you why it did because there are participants with much better info than you that are faster as well.
I think it is a bit malicious since there is no price discovery happening (and price discovery is the primary purpose of a market) and the trades are not based on any information at all, but we can disagree on what to call it. I do agree on the difficulty of knowing why prices move and the fact that other participants may have some knowledge I do not, and would even argue that it is probably more pronounced in the commodities market than the stock market because of insider trading rules and disclosure requirements.
I suppose today it would be impossible for something like this to unfold the same way that it did in 1955. Still, given how much larger the financial services industry is and how clever they have been at packaging and repackaging things, could a few well-financed traders accomplish the same outcome today?
I would not suppose that. Some commodity futures have very low trading volumes and periodically there are prosecutions for price manipulation. Even for high-volume contracts like crude oil, market manipulation happens (see OPEC) and quirks in the mechanics of the contract can trigger enormous price swings (see WTI last week).
26 comments
[ 14.9 ms ] story [ 81.5 ms ] threadBanning onion futures trading does seem like a blunt solution, and unsatisfyingly incomplete. But it's a hell of a lot simpler than trying to preserve futures trading while also eliminating the perverse incentives that led to this. And it may be that it's simply not possible to have something like futures trading without this systemic vulnerability when the market is small enough for an individual to attempt such a scheme.
That is very definitely not true, as shown by the fact that there are many, many commodities where futures trading is allowed and nothing like this has ever happened.
In fact, the article is frustratingly incomplete concerning how it was really possible in the first place.
Because there must be something really dysfunctional in how a futures market is set up to allow this scenario.
Normally, if someone tries to buy up all the futures, the price would go through the roof, especially once people notice that that is what's happening. The scheme would fail at that point because you'd run out of money.
I also don't really understand how it was possible for the market to be flooded to the point that the produce was dumped en masse. It's not like people had produced more onions than normal or that they'd all go bad at the same time.
The key is that someone will notice, but that someone need not necessarily understand and act appropriately.
(What happened was that one large company bought shares, futures and options in another, which drove the price of those futures and options up. Hedge funds noticed that the futures and options were too expensive, and decided to arbitrate. When the first eventually disclosed that it had enough futures and options to acquire the second, a whole flock of hedge funds were caught with obligations to meet and no means to meet them.)
- There were no future contracts involved, at all. Options are a different thing.
- Porsche didn't need to "corner the market", i.e. buy all VW stock. They only needed 75% to gain certain supermajority rights.
- There wasn't really anyone "noticing anomalies" and misunderstanding them, or trying to "arbitrate" a "too expensive" stock. The VW stock price had been going down as a result of the financial crisis, and a number of traders had shorted it in the expectation that it would go down further.
- Porsche actually lost big in the whole affair; they never reached the 75% because they did run out of money, and the loans they had to take on to do it eventually broke their back. In the end, they were acquired by VW, not the other way round.
I agree that this seems like an overly specific bugfix which won’t cut to the root of the problem. So why hasn’t this happened since then?
It might be the case that commodities markets have gotten too large for these types of corner attacks, somewhat akin to bitcoin being resistant to a 51% attack through sheer size.
One of the main subreddits for stock speculators (wallstreetbets) had to ban mentioning penny stocks or small cap companies because having all the Reddit gamblers pile into something would act like a pump-and-dump
> As the swashbuckling day trader’s imprint on the market becomes more pronounced, moderators are getting stricter in their policing of the board—or “sub,” for subreddit. One user, who’d been a member for three years without posting, laid out the bull case for Lumber Liquidators Inc. and promised another pick the following morning. Call volumes in the company jumped to 71 times the previous one-month average, with shares rising 18.6%.
https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-...
The reason the ban still exists is pretty simple too: no one cares strongly enough to lobby to have it lifted and so it remains by inertia.
Someone tried it recently with hand sanitizer and got clobbered: https://www.airforcetimes.com/off-duty/military-culture/2020...
There are now two futures contracts explicitly banned in the US Code.
Onion Futures, and Box Office Futures.
The 2010 financial reform act banned box office futures are a rider. The CFTC, the regulator, had just approved them after a few years of review. It would have given studios the ability to hedge their movies flopping, and let speculators trade how much a movie might make.
The MPAA hated it, primarily because the overexcited CFTC was trying to burden movie studios with financial compliance regulations in order to launch the market.
The CFTC is the wildest regulator, other Federal financial regulators are extremely timid. But the MPAA flexed its muscle and got a ban on the second futures contract in history.
What makes this malicious?
Stop orders are just another source of liquidity, and they aren’t required. Don’t place your stop order in an obvious location, like right outside the local minima/maxima.
Orders are allowed to be canceled or adjusted, I probably cancel 5-6 orders for every fill when I’m trading, algos are just faster.
Keep in mind that when price moves, it may not be obvious to you why it did because there are participants with much better info than you that are faster as well.
When viewing the poster's submissions, the timestamp for this article displays as '1 day ago'.
Currently when viewing it as a thread, it appears to be posted '3 hours ago'.
Is there a HN database migration / update in progress?
https://news.ycombinator.com/item?id=19774614
https://news.ycombinator.com/item?id=11662380