The solution to ban onion futures trading seems shortsighted. Couldn't this happen again with another type of future contract? Was there really nothing else that Kosuga did that was illegal or could be made illegal?
Someone tried it recently with hand sanitizer and got clobbered: https://www.airforcetimes.com/off-duty/military-culture/2020...
There are now two futures contracts explicitly banned in the US Code.
Onion Futures, and Box Office Futures.
The 2010 financial reform act banned box office futures are a rider. The CFTC, the regulator, had just approved them after a few years of review. It would have given studios the ability to hedge their movies flopping, and let speculators trade how much a movie might make.
The MPAA hated it, primarily because the overexcited CFTC was trying to burden movie studios with financial compliance regulations in order to launch the market.
The CFTC is the wildest regulator, other Federal financial regulators are extremely timid. But the MPAA flexed its muscle and got a ban on the second futures contract in history.
The reason the ban still exists is pretty simple too: no one cares strongly enough to lobby to have it lifted and so it remains by inertia.
I agree that this seems like an overly specific bugfix which won’t cut to the root of the problem. So why hasn’t this happened since then?
It might be the case that commodities markets have gotten too large for these types of corner attacks, somewhat akin to bitcoin being resistant to a 51% attack through sheer size.
One of the main subreddits for stock speculators (wallstreetbets) had to ban mentioning penny stocks or small cap companies because having all the Reddit gamblers pile into something would act like a pump-and-dump
> As the swashbuckling day trader’s imprint on the market becomes more pronounced, moderators are getting stricter in their policing of the board—or “sub,” for subreddit. One user, who’d been a member for three years without posting, laid out the bull case for Lumber Liquidators Inc. and promised another pick the following morning. Call volumes in the company jumped to 71 times the previous one-month average, with shares rising 18.6%.
https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-...
Banning onion futures trading does seem like a blunt solution, and unsatisfyingly incomplete. But it's a hell of a lot simpler than trying to preserve futures trading while also eliminating the perverse incentives that led to this. And it may be that it's simply not possible to have something like futures trading without this systemic vulnerability when the market is small enough for an individual to attempt such a scheme.
That is very definitely not true, as shown by the fact that there are many, many commodities where futures trading is allowed and nothing like this has ever happened.
In fact, the article is frustratingly incomplete concerning how it was really possible in the first place.
Because there must be something really dysfunctional in how a futures market is set up to allow this scenario.
Normally, if someone tries to buy up all the futures, the price would go through the roof, especially once people notice that that is what's happening. The scheme would fail at that point because you'd run out of money.
I also don't really understand how it was possible for the market to be flooded to the point that the produce was dumped en masse. It's not like people had produced more onions than normal or that they'd all go bad at the same time.
The key is that someone will notice, but that someone need not necessarily understand and act appropriately.
(What happened was that one large company bought shares, futures and options in another, which drove the price of those futures and options up. Hedge funds noticed that the futures and options were too expensive, and decided to arbitrate. When the first eventually disclosed that it had enough futures and options to acquire the second, a whole flock of hedge funds were caught with obligations to meet and no means to meet them.)
- There were no future contracts involved, at all. Options are a different thing.
- Porsche didn't need to "corner the market", i.e. buy all VW stock. They only needed 75% to gain certain supermajority rights.
- There wasn't really anyone "noticing anomalies" and misunderstanding them, or trying to "arbitrate" a "too expensive" stock. The VW stock price had been going down as a result of the financial crisis, and a number of traders had shorted it in the expectation that it would go down further.
- Porsche actually lost big in the whole affair; they never reached the 75% because they did run out of money, and the loans they had to take on to do it eventually broke their back. In the end, they were acquired by VW, not the other way round.
What makes this malicious?
Stop orders are just another source of liquidity, and they aren’t required. Don’t place your stop order in an obvious location, like right outside the local minima/maxima.
Orders are allowed to be canceled or adjusted, I probably cancel 5-6 orders for every fill when I’m trading, algos are just faster.
Keep in mind that when price moves, it may not be obvious to you why it did because there are participants with much better info than you that are faster as well.