@futurebird @sewblue If you think the stock market is bad, wait until you look at commodities markets.Originally, you sold commodities (wheat, steel, whatever) when you produced it. It turns out that it’s quite useful to know when you plant a field of corn how much you will be able to sell it for. It’s also useful if, for example, you are building a skyscraper and it will take two years to know how much steel will cost in a year’s time, so you can budget properly.So the idea of a futures market came about. Rather than buying steel that exists now, you buy the ability to buy steel at a fixed price in the future. Or the ability to sell corn at a fixed price in a year’s time. And now both producers and consumers can operate with significantly reduced risk. Having a guaranteed ability to sell X tons of grain at a known price next year lets you plan the amount that you want to plant, and maybe grow a bit more than you know you can sell because you won’t make a loss if you can sell more. So far, so sensible.(Aside: a lot of the antitrust laws in the USA exist because of one person who managed to achieve an onion monopoly. This is an amazing story, and well worth reading, but it’s most fun because laws are written as changes to existing laws, so a lot of the antitrust laws in the USA are of the form ‘onions, and other things that are not onions’).The problem with this model is that it lacks liquidity. A lot of people (especially on the consumer side) don’t want to plan so far ahead. They will buy wheat if it’s available, but might buy corn if it’s cheaper. They may buy steel if it’s available, but might just put of construction to next year if it’s too expensive. And that makes it harder to plan. To address this, you allow speculation.Speculation was quite controversial. A speculator buys and sells commodity futures, but does not want the commodities. They are selling a service where they take risk in exchange for profit. If they expect the price of some commodity to be $110 next year, they might offer to buy it for $100. The producer gets a worse price than they would probably get if they didn’t trade futures, but they get to guarantee that price. If their production cost is $50, they make a big profit, guaranteed. The speculator then has to find someone willing to actually buy the commodity for over $100. If they do, they make money. If they don’t, they take the loss, the producer does not.There were a lot of regulations around speculation, including the ratio of producers and consumers to speculators that could participate in the market. It was viewed as a necessary evil to increase liquidity. And liquidity is important. Markets don’t function without it. But then some smart and evil people managed to convince the government (pretty sure it was Reagan, it’s a fair bet that anything bad in market regulation was probably his fault) that speculation existed to reduce risk (true) and that reducing risk is good (true) so it’s important to relax regulations to reduce risk for speculators (false, the entire reason speculators exist is to take on risks from people in the real economy). So now there’s far more trading between speculators than between buyers and sellers of the actual commodity. There’s no shortage of liquidity, but the flip side of liquidity is volatility (both mean, roughly, that prices can move rapidly. If you want that to happen, it’s liquidity, if you don’t then it’s volatility).A lot of the same thing happened with the stock market.
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