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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 tha

by jere 6y ago

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?

wtallis 6y ago
It seems to me that the bit justifying government intervention is the fact that the onion market was flooded and a lot of onions had to be dumped. Had it not been for the market manipulations, that would have been marketable food that wouldn't have gone to waste. The futures trading is the only reason the hoard then dump scheme made sense. Without that system helping guarantee a payout, attempting to corner the market would have been more risky with less potential reward. 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.
- brazzy 6y ago
  > 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.
  - Arnt 6y ago
    Something similar has happened only a few years ago, well-publicised. Many people noticed the odd pricing. Some of the people who did notice the anomalies misunderstood their cause, and decided on a course of action that didn't lead to any correction (well, except for bankrupting a few misunderstanders). 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.)
    - brazzy 6y ago
      I'm pretty sure you mean the attempted takeover of Volkswagen by Porsche in 2008, but what you're writing is pretty wrong and has very little to do with the discussion about futures. - 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.
  - pjc50 6y ago
    It's quite difficult to do, because it requires inflexible enough production and a storable enough product. There have been attempts in silver: https://en.wikipedia.org/wiki/Silver_Thursday https://en.wikipedia.org/wiki/Silver_Thursday and a weird quasi-corner in aluminium: https://www.bloomberg.com/opinion/articles/2014-11-20/the-goldman-sachs-aluminum-conspiracy-was-pretty-silly https://www.bloomberg.com/opinion/articles/2014-11-20/the-go...
c54 6y ago
Onions and motion picture box office ticket receipts :) 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.
- VRay 6y ago
  This crap happens all the time on small cap stocks 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-profane-greedy-traders-are-shaking-up-the-stock-market https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-...
dan-robertson 6y ago
The reason for this solution is pretty simple: onion farmers felt that the cause of the problem was the onion futures market and they lobbied their politicians to ban them. The politicians didn’t care and banning the futures is a much more obvious visible action than introducing some complicated regulation. It’s also faster/easier to do and looks like a stronger, more serious reaction. So the reason for the ban is that it’s what people wanted and their elected representatives didn’t have strong feelings against it. 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.
pjc50 6y ago
Banning onion futures was a "don't try this again or we'll take away your toys" hammer. Everyone involved now knows there is a risk that next time the authorities will act before they get to take the profits from the corner. Someone tried it recently with hand sanitizer and got clobbered: https://www.airforcetimes.com/off-duty/military-culture/2020/03/17/air-force-vet-stuck-with-17700-bottles-of-hand-sanitizer-with-no-place-to-sell-them-sad/ https://www.airforcetimes.com/off-duty/military-culture/2020...
vmception 6y ago
Yes it could happen again, it was an act of congress. 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.
- mraudiobook_com 6y ago
  Sounds like a usecase for Bitcoin trading.
h1srf 6y ago
Not anymore. The CFTC now has limits on how much of the total market one institution can own.
betterunix2 6y ago
The futures market is notorious for things that are definitely illegal in other financial markets (e.g. the stock market), and every so often you will see news about the CFTC prosecuting someone for market manipulation. Banning onion futures only served as a reminder to everyone that the most extreme forms of bad behavior will not be tolerated, but plenty of less extreme but equally bad behavior is pretty pervasive. Algorithmic trading in the overnight market is rife with malicious tactics (bots try to discover and exploit stop orders, and in some cases bots are just trying to "trick" other bots).
- quickthrowman 6y ago
  > Algorithmic trading in the overnight market is rife with malicious tactics (bots try to discover and exploit stop orders, and in some cases bots are just trying to "trick" other bots). 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.
  - betterunix2 6y ago
    I think it is a bit malicious since there is no price discovery happening (and price discovery is the primary purpose of a market) and the trades are not based on any information at all, but we can disagree on what to call it. I do agree on the difficulty of knowing why prices move and the fact that other participants may have some knowledge I do not, and would even argue that it is probably more pronounced in the commodities market than the stock market because of insider trading rules and disclosure requirements.

by jere 6y ago

wtallis 6y ago

It seems to me that the bit justifying government intervention is the fact that the onion market was flooded and a lot of onions had to be dumped. Had it not been for the market manipulations, that would have been marketable food that wouldn't have gone to waste. The futures trading is the only reason the hoard then dump scheme made sense. Without that system helping guarantee a payout, attempting to corner the market would have been more risky with less potential reward. 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.

brazzy 6y ago
> 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.
- Arnt 6y ago
  Something similar has happened only a few years ago, well-publicised. Many people noticed the odd pricing. Some of the people who did notice the anomalies misunderstood their cause, and decided on a course of action that didn't lead to any correction (well, except for bankrupting a few misunderstanders). 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.)
  - brazzy 6y ago
    I'm pretty sure you mean the attempted takeover of Volkswagen by Porsche in 2008, but what you're writing is pretty wrong and has very little to do with the discussion about futures. - 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.
- pjc50 6y ago
  It's quite difficult to do, because it requires inflexible enough production and a storable enough product. There have been attempts in silver: https://en.wikipedia.org/wiki/Silver_Thursday https://en.wikipedia.org/wiki/Silver_Thursday and a weird quasi-corner in aluminium: https://www.bloomberg.com/opinion/articles/2014-11-20/the-goldman-sachs-aluminum-conspiracy-was-pretty-silly https://www.bloomberg.com/opinion/articles/2014-11-20/the-go...

c54 6y ago

Onions and motion picture box office ticket receipts :) 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.

VRay 6y ago
This crap happens all the time on small cap stocks 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-profane-greedy-traders-are-shaking-up-the-stock-market https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-...

dan-robertson 6y ago

The reason for this solution is pretty simple: onion farmers felt that the cause of the problem was the onion futures market and they lobbied their politicians to ban them. The politicians didn’t care and banning the futures is a much more obvious visible action than introducing some complicated regulation. It’s also faster/easier to do and looks like a stronger, more serious reaction. So the reason for the ban is that it’s what people wanted and their elected representatives didn’t have strong feelings against it. 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.

pjc50 6y ago

Banning onion futures was a "don't try this again or we'll take away your toys" hammer. Everyone involved now knows there is a risk that next time the authorities will act before they get to take the profits from the corner. Someone tried it recently with hand sanitizer and got clobbered: https://www.airforcetimes.com/off-duty/military-culture/2020/03/17/air-force-vet-stuck-with-17700-bottles-of-hand-sanitizer-with-no-place-to-sell-them-sad/ https://www.airforcetimes.com/off-duty/military-culture/2020...

vmception 6y ago

Yes it could happen again, it was an act of congress. 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.

mraudiobook_com 6y ago
Sounds like a usecase for Bitcoin trading.

h1srf 6y ago

Not anymore. The CFTC now has limits on how much of the total market one institution can own.

betterunix2 6y ago

The futures market is notorious for things that are definitely illegal in other financial markets (e.g. the stock market), and every so often you will see news about the CFTC prosecuting someone for market manipulation. Banning onion futures only served as a reminder to everyone that the most extreme forms of bad behavior will not be tolerated, but plenty of less extreme but equally bad behavior is pretty pervasive. Algorithmic trading in the overnight market is rife with malicious tactics (bots try to discover and exploit stop orders, and in some cases bots are just trying to "trick" other bots).

quickthrowman 6y ago
> Algorithmic trading in the overnight market is rife with malicious tactics (bots try to discover and exploit stop orders, and in some cases bots are just trying to "trick" other bots). 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.
- betterunix2 6y ago
  I think it is a bit malicious since there is no price discovery happening (and price discovery is the primary purpose of a market) and the trades are not based on any information at all, but we can disagree on what to call it. I do agree on the difficulty of knowing why prices move and the fact that other participants may have some knowledge I do not, and would even argue that it is probably more pronounced in the commodities market than the stock market because of insider trading rules and disclosure requirements.