Should we self-insure?
- Thread starter TGregg
- Start date
If you don't want to be exposed to the possibility of going bust during an extreme market move, then don't trade, or trade without leverage, or leverage but use options to hedge. If you want to take the risks to get the extra rewards from unhedged leverage, then don't moan when you suffer the consequences of your risk-taking.
Remember, a futures trade is a voluntarily undertaken contractual agreement, which commits you to obligations under the rules of the exchange. Ratting out on your side of the bargain is breaking your word - pure fraud and deception. Futures contracts don't contain get-out clauses for when the market moves beyond a certain amount, or when the move is the result of bad luck. By trading in them, you are agreeing to meet your obligations under *all* circumstances no matter how disastrous.
As for the morality of it all, when traders are "profiting from disaster" (actually they are profiting from inefficient prices) who is the victim? Prices will adjust to the disastrous news whether trading takes place or not. So the only "victim" of trading on the news is the person on the other side of your trade - someone who willingly took the risk. And if there is no innocent victim, then nothing has been done wrong. You might as well condemn funeral directors for profiting from death.
In any case, trading must resume at some point. Given that the reopened market price will have reflected the bad news, then the first person to buy will automatically be trying to "profit from disaster". The only way to avoid profits from disaster is to never allow any trading to take place ever again.
As for luck, real traders take the rough with the smooth. The don't expect sympathy when bad luck hands them losses, so why should they be criticised when fortune smiles on them for a moment or two? In the long run the surprise profits are balanced out by surprise losses - so someone who gives away their profits is simply ensuring net losses from the totality of surprise news over the course of their career. Where is the "justness" in that?
If someone nukes NYC, I will be shorting everything I can. And if I got nuked I would expect all self-respecting traders to do exactly the same. I wouldn't have it any other way.
Remember, a futures trade is a voluntarily undertaken contractual agreement, which commits you to obligations under the rules of the exchange. Ratting out on your side of the bargain is breaking your word - pure fraud and deception. Futures contracts don't contain get-out clauses for when the market moves beyond a certain amount, or when the move is the result of bad luck. By trading in them, you are agreeing to meet your obligations under *all* circumstances no matter how disastrous.
As for the morality of it all, when traders are "profiting from disaster" (actually they are profiting from inefficient prices) who is the victim? Prices will adjust to the disastrous news whether trading takes place or not. So the only "victim" of trading on the news is the person on the other side of your trade - someone who willingly took the risk. And if there is no innocent victim, then nothing has been done wrong. You might as well condemn funeral directors for profiting from death.
In any case, trading must resume at some point. Given that the reopened market price will have reflected the bad news, then the first person to buy will automatically be trying to "profit from disaster". The only way to avoid profits from disaster is to never allow any trading to take place ever again.
As for luck, real traders take the rough with the smooth. The don't expect sympathy when bad luck hands them losses, so why should they be criticised when fortune smiles on them for a moment or two? In the long run the surprise profits are balanced out by surprise losses - so someone who gives away their profits is simply ensuring net losses from the totality of surprise news over the course of their career. Where is the "justness" in that?
If someone nukes NYC, I will be shorting everything I can. And if I got nuked I would expect all self-respecting traders to do exactly the same. I wouldn't have it any other way.
The legal relationship is that you trade with your broker. Your broker then has a contract with a clearing firm, who then has a contract with the exchange. So basically there are several legal liabilities - customer to broker and vice versa; broker to clearer; clearer to exchange. As in all other business contracts, if you have a liability to a creditor, that liability is not absolved just because one of your debtors has defaulted. So brokers effectively take on the credit risk of their customers, just as customers take on the credit risk of their brokers.
If you go broke, leaving them with uncovered losses, they still have the liability for those losses in their agreement with the clearing firm (or with the exchange, if they are self-clearing). They will of course try to get as much back from you as possible, but the amount they can't reclaim is basically their responsibility.
TGregg,
your original question is still very valid.
Even if the exchange would excuse you from e.g. 70% of a 600 point loss, you would still face a whopping -9000$$$ per contract which sums up to a nice quarter million on 6 cars.
This has always been my reason for which I like short positions much better and prefer them over long's, like many traders do.
There are reasons / imaginable events why the mkt might drop 50% or even 70%.
But there are no reasons why the mkt would move up 30%, at least for equity markets.
your original question is still very valid.
Even if the exchange would excuse you from e.g. 70% of a 600 point loss, you would still face a whopping -9000$$$ per contract which sums up to a nice quarter million on 6 cars.
This has always been my reason for which I like short positions much better and prefer them over long's, like many traders do.
There are reasons / imaginable events why the mkt might drop 50% or even 70%.
But there are no reasons why the mkt would move up 30%, at least for equity markets.
Hey Cutten,
Thanks a lot, this does make perfect sense. Yes, indeed, in no business can you default to your creditor because of a debtor's default... LOL (be nice if so...)
However, I never thought as everybody in the trading business chain being "indebted" to each other, rather thought all the brokers etc would be mere "order matchers/executors" for their clients, with all the responsibility fully remaining with the clients...
I just read that up and realized that you're certainly right there. Quite a scary thought now, to think that all these links in th chain are indebted to each other, and if only one of them defaults/skips the line/runs away with the money/debt or anything like that, then the others are basically in trouble... Depending on how well financially backed they are... This does indeed make this business a very very risky one (and it makes me wonder how they can keep all the regulation clean).
However, there is another conclusion that's well to be said: Of all the risks involved, the most lies with us, the end-user, the trader. Either way we put it, every chain in the link has a better legal structure etc to protect their individual assets than we have. None of the IB executives will be stripped of their belongings, just because IB defaulted on a Billion-Dollar debt. The worst that happens is that they lose their job.
The worst that can happen to us as private traders doesn't require much illustration... And no matter what legal structure we have, it is very difficult to dodge delivery obligation. I can protect my jewellery business against liability beyond my means via a P/L structure, but that doesn't really work with futures trading afaik...
What do you know, Cutten, are there any legal ways out there to protect yourself against maximum liability?
Best Regards.
Well, how do enterprenours protect themselves in any other business? They set up companies and their risk is limited to the amount invested to the company. I.e. the owners of the company are not liable for its depts. Why would this not be possible for traiding? Or do the brokers have different margin etc. rules for companies compared to individuals? Trading trough a company could bring tax benefits also (depending on the tax laws of your contry of course).
Any comments?
Bungle
