Sitting here watching the local news and our wonderful senator, one Amy Klobuchar, got some air time. She has proposed limits be placed on the evil speculators.
She is an econ illiterate and clearly doesn’t realize this is also a restriction on the hedger.
But then again they are evil monied interest as well…
If this goes through, what will it change?
Answer: More volatility. Less liquidity. Wider bid/offer spreads.
Proof: Hypothetically extend the restriction on speculators to outrigh prohibition of such activity. Imagine markets and prices then.
Z.
I agree with what z1235 said.
And if you want to read more on speculators, here is an article from Bob Murphy called “The Social Function of Stock Speculators”:
I can say that all market place participants will be worse off.
Minor:Suppliers will be forced to store real things in the expectation of future price hikes. So these suppliers will need to build facilities to store stuff or increase productive facilities to handle future demand.
Minor: Suppliers will be forced to carry these facilities or sell them at a loss in the expectation of future price decreases.
Major: Suppliers will not be able to make investments in future supply as they can not sell the supply before the time. An example of this would be to stop farmers from entering into futures contracts so they could not buy seeds and what not by selling their products ahead of time. The suppliers would be forced to take on more debt and the interest payments that come with it.
Most Important: The market will lose the feedback mechanism that it uses to punish bad participants including speculators and reward good participants in supplying the demands of future consumers. The market will be less efficient in providing supplies to meet future demand regardless it increasing or decreasing.
Market participants would simply work around the restrictions in creative ways that normally cost more and involve getting into more debt. For example, these two risky derivative schemes are identical except for the commissions involved and the interest payments on debts:
Naked short sell where a speculator sells a commodity that the speculator does not have hoping that the price goes down so they can buy it back later at say $10 cheaper.
Naked Call seller where the same speculator takes a margin loan and buys the commodity paying the commission, Buys a put at the purchase price and pays a commission. Sell a call at the expected buy back price and pays commission.
Assume that the speculator was exactly correct. At the end of the month the stock sells for $10 less than it idid when the above transactions took place.
The short seller buys back the shares sold and pockets $10 plus pays 2 commissions.
The long-short seller sells the stock at the call price and pays a commission, Sells the put and pays a commission to get back the original price.. Then pays interest on the margin loan. So the Naked Caller is out 5 commissions and interest.