All markets with paper of any sort are now broken IMO. Here's a post that resonated with me. Along with my physical metals I think I'll add cotton underwear. :-)
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I fear that the cotton market is broken...
The cynic in me wants to say, “I’ve fallen and can’t get up,” in regard to the current cotton market. And while that failed attempt at humor may seem crass, it also is a statement contains elements of truth. The present cotton market doesn’t seem to be able to serve the role which it has dutifully performed for almost 140 years now. Price discovery isn’t supposed to be found off the screen and available only to those lucky enough to have secured a position in the option ring. And how about using the market to offset price risk associated with ownership of the underlying contract? Has it anything at all to do with the current cash market for cotton?
I’m sorry, but until things settle down I cannot legitimately and in good faith promote customers to transact business in cotton options when quotes are routinely 200 points wide. It has become a crap shoot and the dice are in the hands of one high roller after another, hell the entire table is oozing with them, each eager for their turn to roll. All of the positions on the table are held by speculative money, big speculative money. Trading this entire week has been so wild and wooly it’s akin to what you read in novels about the wild, wild, west back in the 1870’s. It is gambling. I’d rather suggest that you wait until things cool and prices trade on the screen. This transitional futures market, (synthetics) means the price has disappeared from that screen.
Regular readers of my comments will know that I have been speaking of the issue of big fund investment in our market for over a year now. Well, the forces of fear and greed have taken over from risk transfer. And from what I understand, there’s not much actual cotton business getting done. And that’s a problem in my book. When a market has little if any reason to move about as violently as it has and moves simply in reaction to size and the current order flow, and it doesn’t seem to give a damn whatsoever about fundamentals, then it’s broken. From what I gather, it happened in wheat, now it’s happened in cotton, what markets are next?
There is no fundamental reason for the price to be one day at $1.07 and two days later at $0.80. Explain that one. I cannot.
So, until things get sorted out and calmed down, the sideshow they used to call cotton is destined for a bunch of “whales” (I think that’s a term for high rollers) and sharks. In fact, I thought I saw a couple of great whites swim by the ring today.
My primary business has been executing customer orders in options. That’s what I get paid for. I am not a trader, although I may take small positions from time to time, it has always been my job, as I see it is to duly represent my customer’s request to buy and sell options in the soft market (agricultural products) on the ICE. That is my principle business, has been for years. The more orders I execute, the more I revenue my firm receives. But for $3.00 a contract somehow doesn’t seem worth it. The risk is far too great with quotes 200 points wide, (or $1,000.00 between bid and offer), then something is terribly wrong. One mistake and you’re out of business.
No, I’m not quitting, I’m just suggesting that things are out of control temporarily and that prudence suggests at such times maybe its worth taking a step back and re-evaluating. Look if you wish to trade, I will work hard for you, and get you the best possible fill. I’m certainly not in any position to turn business away, but please try and understand the risks involved in this present market that seems out of control.
Anyway, here are the Synthetic settlements for cotton. No, you won’t see these on any screen, or in the newspaper. However, they do exist on your statements, especially if have any cotton positions on. These settlements are different than what you see on the charts too, as synthetic trades are not picked up for charting purposes. (Doesn’t that make it seem more like you are trading blind?) These are the prices that traded on the close, or post close and are derived from a weighted average as each selling broker must fill out and submit a trading slip of any and all contracts he transacted on the close.
K-8270, N-8480, V- 8720, Z-8910, H-9140
I had originally thought that we would experience some stability in prices today. Boy was I ever wrong. I’m concerned about the long term effects on the traditional market participants. As I stated here yesterday, “These markets are getting further away from reality and seem more like a video game is being played.”
Look for another wave of margin calls and that may serve to again thin the trading ranks, not the number of contracts, but the number of participants. Then again increased margins have frequently be used to help tone things down, by persuading traders to reduce their positions. Limits will remain at 400 points for now.
I look for continued volatility, with further testing of the downside. Volatility may taper off a little bit on a down move as it did today, but then heat up swiftly again should the highs come back into play. As for now, let’s see where it holds, then watch for a move back up. Remember $1.17 is still around lurking on the charts. We are apt to see more volatility, with frequent more limit moves.
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