Saturday, May 05, 2007

The future is optional...

While many producers are watching the CBOT buyout with mild interest and eyes glazed by so many zeroes, it may simply be just a sideshow in a larger push to find a play for enormous amounts of money. Right now, derivatives are the investment of choice, it seems.
Derivatives are so called because they derive their value from an underlying asset, such as a stock, bond, interest rate or commodity. Their use has exploded over the past couple of decades. Philadelphia is one of six American exchanges that trade options (which give holders the right, but not the obligation, to buy or sell a security). Futures, the other big exchange-traded derivative, are promises to buy or sell on a given date. [More]
With computer algorithms driving stock trading, what's a broker to do with her free time? Trade somewhere else, I suppose, and here on the farm, we're the game people are betting on.

The attraction, as outlined in the article above is manifold:
Joshua Carter of Goldman Sachs sees “derivatisation” as one of the three main trends in the exchange business, along with consolidation and “electronification”. One attraction, he points out, is that derivatives are typically more liquid than their underlying assets. Also, their highly mechanical nature makes them well suited to algorithmic trading, which is growing. And transaction costs are lower than stocks for a given unit of exposure.
All this could mean some very, very wealthy commodity brokers soon.

But then, they could be the last of their breed, too. Open outcry will likely be kept on just for background footage for ag video - like gambrel barns and windmills.

Hey - we use it at USFR.

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