Remember ex-first lady Hillary Clinton’s success with trading in cattle futures? She reportedly turned a profit of $99,000 , on an investment of $1,000. I know that risk is associated with reward, but it seems to me that gambling on the future value of commodities must be extremely risky. So, do these commodity traders enjoy high incomes? If this is so, it must mean that :
(a) either these markets are being manipulated in some way (so as to give the advantage to the traders), or
(b) primary producers are stupid-they sell their products (cocoa, coffeee, hog bellies, etc.) at too low a price…allowing traders to profit from their ignorance
So, how well do commodity traders do? Are they all like Hillary Clinton-able to turn a tiny investment into a mountain of cash?
If (b) is the case, then I intend to get into this racket!!
Of course, you assume these well paid traders are trading THEIR OWN money. I would say that they are making a very good salary because:
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Firms employ them at high salaries to trade other people’s money and they have built a reputation for themselves at generally winning more than losing such that people would trust them.
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They get a commission with every sale and thus make money whenever something changes hands - if the market goes up or down. In a market this volatile, things change hands ALOT, hence lots of commissions.
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Hi Opal!
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Finally, I would bet that when you are in the business of trading futures, you start to notice vague patterns or are privy to information that will affect the market (i.e. you are conducting a huge trade for a client like Bill Gates that will automatically affect the market, so you position yourself accordingly)
Of course, these are my best guesses. The only facts I can offer you are that: 1) I have an MBA from a top 20 university and 2) people in my class who went the finance route make a shitload of money relative to us marketing pleebs
The overwhelming majority of people who stray into the commodities markets get burned alive. The degree of brainpower, analytic sophistication, insider information, luck, research, insider information, luck, sheer manpower, insider information and blind luck cannot be underestimated, thus making your idea a very bad one indeed for all but the few–and the very lucky.
Yes, the upside can be astronomically lucrative (I retired at 34 1/2 trading metals, but left with shot nerves). But the downside can destroy a life’s savings in a matter of one or two big bad trades. I’ve seen it many, many times–really brainy people completely wiped out. Blind greed is punished brutally. Venture into this “racket” and you will likely leave poorer for your efforts. Let the investor beware.
Brokers, that is, people who get paid to trade someone else’s money, do get paid pretty high salaries, but the trade off, as tsunamisurfer mentioned, is the enormous stress involved. There are very few people who can do it well, and hardly anyone who can do it at all beyond a few years.
Note that the term for this is “front-running”; unethical and illegal.
I think perhaps you misunderstand how it works. I’m certainly not an expert, but if you have the misconception I think you have, perhaps I can clarify.
When trading futures, you aren’t buying and selling actual goods. You’re buying and selling contracts to buy and sell actual goods. So, if I examine the factors and consult my psychic and decide that wheat is priced way low, and about to appreciate in value, I buy a contract to buy, say, 1 ton of wheat in December, for today’s price. If the price of wheat goes up, my contract is more valuable, because it allows whoever owns it to buy the wheat at a lower price. If the price goes WAY up, obviously my contract is worth more than if the price goes up only a little bit.
On the other hand, if I feel the price of wheat is about to fall, I can buy a contract to sell wheat. If the price goes down, my contract is worth more, because my contract states that this wheat will be sold at the price wheat was at when I bought the contract.
This, at least, is my understanding of the basics. I’m sure the money gurus can flesh it out and point out my mistakes.
Does the whole system not work something to the effect of: for me to make a million dollars trading whatever, someone or many others have to loose that million dollars somewhere else?
I think the very few succesful traders get that way be taking advantage of (even indirectly) the majority of new/bad traders who loose everything. And as pointed out already, the days are numbered for even the best people in that business.
Tsunamisurfer: I am intrigued by your experience. YOu traded metals…so educate me please. Suppose you are trading contracts for an exotic metal, line IRIDIUM. Suppose IRIDIUM is only produced by 3-4 companies, and you sense that the price is low now. So you by a contract entirling you to buy at say $400.00/oz. Then, a mine in Zambia blows up, and there is a shortage-now the market price rises to $1000.00/oz. Why would your seller honor his original old price? Aftre all, he is losing $600 on evey ounce he sells at the old price-why would’nt he prefer to take a loan against his inventory, then sell a contract to you?
well, ralph, my previous post was eaten. You’re essentially correct, the counterparty who is short the IRIDIUM is going to scramble like hell to see if he can borrow some IRIDIUM to deliver to you. Then after the Zamian mine goes back on stream, he will be able to return the borrowed IRIDIUM to whoever he borrowed it from.
Why would he honor the old price? This is known as counter party risk. He might not. Then you could try to sue him.
It is worth noting that a future is traded through an exchange while a forward is traded between the buyer and seller. In the case of a future, the exchange guarantees that the trade will take place. In the case of a forward, you do not have such a guarantee in place.
Remember when Barings went bust? Ol Nicky L was long and wrong Nikkei 225 futures contracts traded through the Osaka futures exchange (and some through the SIMEX). After Barings assets were used up, any shortfall was paid for by members of those stock exchanges. Don;t feel too bad for those exchange members, they made a lot more by shorting those futures to Nicky in the first place.
Still, exchange losses born by members is essentially insurance against direct counter party risk.
Professional commodity trader here.
LOT of misconceptions here. Noone earns there keep like commodity traders. First, distinguish from a broker who takes no risk and merely get’s a commission.
I get a salary, about 100k, which is small by Wall Street standards. I manage a certain amount of money and get 20% of the first 5 mil i make, 25% of the next, and 30% of every dollar after that. I am not a bond trader who get’s his money by virtue of the seat he’s seating in (He buys wholesale and sells retail). When I buy, say oil futures, I PAY the bid/ask spread. If I buy oil at 25.20 and immediately sell it, ill probably sell it for 25.19. I have to be right on the direction to make money to pay for the spread, the commission i pay to the broker, and for profit for moi.
Good trader’s are the richest people around beside’s startups. Bad trader’s are no longer traders. Only 5% of people who trade make money and thy’re taking home 100% of the winnings so do the math.
When people speak of front running, they are typically speaking of floor trader’s who are also acting in the capacity as a broker. They illegally put in their order’s before a large customer order and cover after for a quick scalp.
…as i understand it, HRC bought a contact entitling her to buy so many tons of beef at a certain price. The price of beef then commenced a sharp rise, so that her contact was worth much more than she paid for it. She then sold the contract at an enormous profit.Would not the primary producer (ie. the rancher) be also trying to protect himself? Logically, he would have bought a contract to hedge himslf in the event of a price rise.with so many people guessing the direction of the market, it would seem that any change in price would be instantly reflected in the value of the contracts…this woudl reduce a hypothetical trader’s profits to a "normal’ level (5-6%).Now, it was alleged that HRC had some “help”-after all, it is hard to think that a lawyer with no expertise in futures trading could have profited so spectacularly, in such a market dominated by experts. SAuppose I see the direction of cocoa prices as heading up (disease is destroying the cocoa trees in Brazil), so I take my $1000.00 in hand and set out to make a million. What chance do I stand, and how much leverage can I obtain with $1000.00 investment?
It is also front running if the portfolio manager puts an order in for his or her personal account prior to executing a trade for third party funds under managment.
http://www.lfgfutures.com/backtool/margins.htm shows one firm’s various “margin” requirements. Your $1000 is enough margin for one cocoa contract (10 tonnes, worth about $15,000).
Note that this margin doesn’t actually buy anything.
The margin you put up is merely “earnest money”, providing some assurance to your broker that if you lose, you will be able to pay. The exchanges get assurances from the brokers that if their clients lose, the brokerages will pay. In return, the exchange gives assurance that if brokerage clients win, they will be paid.
If the market moves against you, you will be required to put up “maintenance” (a.k.a. “variation”) margin - maybe the day after the trade you are already looking at a book loss of $1000, so they want more earnest money to prove that if it goes against you some more, you can take it. But the money is still yours, it’s just on deposit … until the contract is closed out (or delivered!).
How much chance do you have? Virtually none. The pros found out about the disease in Brazil long before it got into the papers and have paid for thick agronomist reports on the potential effects. Then, after having taken their positions, they called the newspaper with the story and you found out about it.
Yes, some “retail” investors make money. Most get wiped out.
In a commodity market for perishable goods (like beef, coffee, hog bellies)there has to be some assurance that the goods are of good quality (ie. edible) and saleable on the retail level? I recall the old joke about the commodity trader trading cans of sardines…one day he opens a can, and the fish are bad! he complains to his boss…and the boss tells him…“these sardines are for trading, NOT eating!!”
So how do you know (or do you even care)that the contarct for pork that you are making a killing on, involves meat that is even saleable?
For the Professionals:
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What is a fair and reasonable contract price from a broker?
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How much $$ do I need for a pro to mess with me? I mean can I show up at jiHymas Inc. or GoldmanSachs (formerly Tsunami inc) (or a pvt broker) and say “Hi I have $ 2500 I can play with” or will they laugh thier assses off, dial security and call up Bill Gates to giggle over a YOU WILL NEVER BELIEVE THIS story…
re the OP, and correct me if I’m wrong boys, but (besides “Hedge Fund manager”) The guys on WS making shocking salaries in a profession that “you can get into” as a very general, over simplified rule, are the Investment bankers.
The exchanges take good care to ensure that their contracts will be closely related to the spot market; otherwise the market would lose its value for the “hedgers”, that is, the producers and consumers of the actual goods. Lots of rules, lots of inspections, lots af adjustments to the quoted price.
Without these safeguards, the market wouldn’t exist.
There is some good information regarding hog deliveries, including how to calculate whether to deliver on the contract you have sold, or whether to close it out at http://www.ianr.unl.edu/pubs/farmmgt/g724.htm
It will vary from firm to firm (and even between brokers in the same firm) according to your trading size, other relationships, etc. One example is at http://www.newhalldiscount.com/tour/programs.html. You have to be a bit careful in considering prices, however, due to the margin requirements. I know of one “discount” place (many years ago) that had really low commissions … but a very high initial margin requirement, on which they did not pay interest. Upon doing the math, it turned out that the lost interest on the excess margin made them not-so-discount.
No good answer. There are probably some futures-based mutual funds around structured like any other fund in terms of fees and minima. In the “normal asset management” world, there are some relatively small (i.e., $300 million under management) firms that won’t look at you if you have less than $1 million. Some (individual) stock brokers will take your pathetic life savings and trade it for you completely inappropriately. In general, I would be very suspicious of anyone offering to take on an account with less than $100,000 (unless it was part of a pooled or mutual fund) … and that would be a bare minimum, with the client having other financial assets outside the account.
Actually, the primary producer would logically sell contracts, to lock in a price where he can make a profit doing his normal job of slopping the pigs, etc. He doesn’t want to buy a hog for $100, spend $500 fattening it up, and then find at the end of the season that he can only sell it for $400 … he wants to make his plans with a futures contract in place to sell it at $700 … and if the price eventually goes to $800, that’s just the way the ball bounces.
The purpose of futures market is to allow producers and consumers to make long range plans with firm prices in place, transferring the risk to speculators (who expect to get paid for this service).
Incidently, I’m not a professional futures trader, although I do take a flutter from time to time on interest rates. I’m a fixed-income guy.
Jimmmy,
Can’t remember who now exactly asked these but…
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If you wanna dabble, comissions at lind-waldock and/or jack carl futures is the cheapest around for your purposes (about 25 bucks a round turn). Account minimums are like 5k. These discount houses are more than good for your purposes. Your order would be 100+ at Merrill Lynch and you wouldnt have half of the efficiency of order execution.
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Question about saleability - Take CBOT Wheat, a contract calls for 5000 bushels of wheat delivered to a certain cargo hold, on a certain day with a certain moisture content.
Actually, the prices are set by the market. Whenever the future contracts get “too” far out of line, then arbitragers will drive the price back towards fair value. The exchanges do not “adjust” the price. Market makers may do so, but market makers are the “market” and assume risk.
I didn’t make myself clear! By “closely related to the spot market”, I meant in terms of delivery specifications, not in terms of somehow imposing a price.
By “price adjustments” I meant the adjustment to the contract price on the basis of the quality of commodity actually delivered, e.g. (from the page previously cited, http://www.ianr.unl.edu/pubs/farmmgt/g724.htm)