Reading the book, A First-Class Catastrophe – the road to Black Monday by Diana B Henriques published by Henry Holt and Company, NY, 2017 and the book is about regulations, new products and the fight over who should regulate the new products.
When the stock market began it was dominated by individuals and to accommodate the individual requirements, systems were built up. They include timelines such as buying the stock took 5 days to change hands or cash is needed in the account. Throughout the decades for the most part the regulations worked. Over time, the institutions such as mutual funds, pension funds developed and became larger. The funds would have different timelines and demands on the exchange for example if you sold 50 shares in the market, the price would not change but if you begin to add zeroes to 50,000 shares and sold into the market, the price will change. If the systems are not updated to accommodate the big players, the insiders would notice and take advantage of (and they did). The larger players demand transparency and electronic trading. The exchanges need to cope with the changes.
With the rise of the large players, they needed to ensure they are protected from the ups and downs of the stock market and a whole new trading feature is developed – the financial futures. With the growth of the financial futures, it affects the markets because of use of stop loss features. If the stock market goes down, sell off X %, if the stock market goes down further, sell off X %. Who buys when the market goes down has been the big question for it turns out many institutions act like individuals when the market makes large moves upwards and downwards. Behind the scenes the exchanges fought over the regulations, how much regulations are needed and profits to be made with financial futures. The 2 exchanges are the NYSE and the Chicago Mercantile Exchange or the MERC.
One very interesting story on the Merc is the only commodity that does not trade is onions. The story is back in 1955, a farmer Vince Kosuga decided it was a good time to corner the market in onions. He bought onions across the US and hoarded them, he also teamed up with a trader in Chicago to buy futures and then puts to profit on the hoarding and at that time when people bought futures they took delivery of the good. He then flooded the market with the onions and the puts rose in value.
The national regulator of the commodity exchanges is called the Commodity Futures Trading Commission or CFTC and they banned onion trading, and it is still banned.
Linking to dividend paying stocks, when you buy a stock there are rules and regulations behind the scenes and with every rule and regulation, there will be people who want more regulation and people who want less. Within the rules and regulations are new products which meet a demand and similar to the grocery shelf where new products come and go, so do financial products come and go. It is a never-ending story and regulators are some steps behind. When the markets are up, more new products will come to the market, that is when as an investor you like to jump in and make profits, but cycles come to lose the money just as quick, and your objective is try not to lose money.
There are more questions than answers, till the next time – to raising questions.