How does trading benefit the economy? | Forex Factory

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How does trading benefit the economy?

  • #1
  • First Post: May 12, 2011 4:54am May 12, 2011 4:54am
This is a weird question I know but I ask myself this all the time.

How do professional traders and Hedge funds actually benefit the economy?

Do their vast profits really trickle down to the "little people"?
  • #2
  • May 12, 2011 5:04am May 12, 2011 5:04am
Quoting kuzco
This is a weird question I know but I ask myself this all the time.

How do professional traders and Hedge funds actually benefit the economy?

Do their vast profits really trickle down to the "little people"?
Have you seen "Inside Job"? If not then I suggest you do.
  • #3
  • May 12, 2011 5:16am May 12, 2011 5:16am
Quoting kuzco
This is a weird question I know but I ask myself this all the time.

How do professional traders and Hedge funds actually benefit the economy?

Do their vast profits really trickle down to the "little people"?
It is a zero sum game, so there's no real benefit. The argument you'll hear from traders and market makers is that they provide liquidity, which in essence means that their activities reduce the cost of trading. However, I feel that we've long reached a point where the marginal benefit of liquidity for many assets is next to zero.

The financial sectors in developped countries are far too big, and countries would benefit if the human resources would be deployed elsewhere.
The nail that sticks out gets hammered back in
  • #4
  • May 22, 2011 2:01pm May 22, 2011 2:01pm
Hi kuzco! Got to admit: I have asked myself the same question during the years, and it seems that this issue is controversial. From the little-man's point of view, I think manipulative hedge funds are bad for day-trading, because they actually have the power to shake you out of a trade. It is not their intention to shake you out, but their tools of making profits can harm the little trader. From an economic point of view, they may also be a bad influence, especially in commodities where prices are getting more and more volatile. The authorities are trying to fight them back. Lets us all hope they will succeed.
  • #5
  • May 22, 2011 3:14pm May 22, 2011 3:14pm
Im not sure about spot market, but in the futures market traders provide liquidity which the commercials can use to hedge themselves against movement in materials costs, for example an airline company can use oil contracts so that they offset the increase in price, this means they do not initially need to pass on the costs to passengers, which means people will continue to fly and they can continue to employ people.

if they have to put up fares, less people will fly, then they will have to lay off workers, then unemployment goes up,, then less people fly and so fourth.

at least i think ive got it right, im no ecomomist.

see "dan airelons" trading and investing channel on youtube, he talks a bit about how futures traders benifit the economy.

I think derivatives harm the economy, do they not?
  • #6
  • May 22, 2011 6:15pm May 22, 2011 6:15pm
Quoting highlander2
Im not sure about spot market, but in the futures market traders provide liquidity which the commercials can use to hedge themselves against movement in materials costs, for example an airline company can use oil contracts so that they offset the increase in price, this means they do not initially need to pass on the costs to passengers, which means people will continue to fly and they can continue to employ people.

if they have to put up fares, less people will fly, then they will have to lay off workers, then unemployment goes up,, then...
For starters, a futures contract is a derivative itself. A derivative is any instrument which, at least in part, gets its value from another instrument. So that's Futures (I want to lock in this price for my orange concentrate), options (I don't want to pay more than £X for my USD), swaps (I want to swap one cash flow for another), Forwards.... All of these things are used legitimately by business to reduce risk and keep product prices steady and do what is generally smart practise.

You'll be thinking about credit default swaps which featured in the financial crisis. They're not intrinsically bad... just like any other instrument though, the markets they trade in can be manipulated or in the case of the financial crises, people can get greedy/fail to understand what they are buying and the risks that are involved.
Living the adventure in my head.
  • #7
  • May 22, 2011 7:23pm May 22, 2011 7:23pm
It's not all black.There is a global benefit for economy from traders.

Suppose there is a large investment company that can predict future. Then one day they predict that a big depletion disaster would hit oil. So they star buying oil and push the price up. Naturally as the price go up it benefits the oil drillers that in return can invest more in oil rigs. Also it forces the economy to search for other means of energy so they don't depend on oil so more. And the day the disaster hits - not so bad as it would be....

If you put all the market manipulation aside global economy "pays" traders as one global entity to predict the future. Naturally, in the process of that, good traders fleas the bad traders so they can't force the prediction to be wrong. This is why we say - market is never wrong.
  • #8
  • Edited 10:28pm May 26, 2011 11:27am | Edited 10:28pm
Firstly, do you understand - at least to some extent - why we need fluctuating exchange rates? I'll just assume you do and keep this reply simple, as discussing why we need exchange rates is a very cool but lengthy topic.

Traders of currencies (futures, spot, etc.) benefit the global economy by ensuring that exchange rates are as accurate as possible to the available relevant information. This facilitates the most beneficial allocation of resources at any point of time.

If, hypothetically, exchange rates were not an accurate representation of their true value, then there would be transactions made that were 'inefficient' ... i.e. they would not be the best trade in respect of global 'welfare'. This welfare effect is implicit, but observable; i.e. global welfare will be less if exchange rates are not accurate, even though no assets will have been destroyed or money squandered ... kind of like if an apple goes to the person who wants it the most (and will therefore pay the highest price for it), then the difference between the value that person places on the apple, and the alternative persons value, is what is gained by society by making the correct allocation - even though no apples are squandered in either scenario.

Some portion of this difference in global welfare between the currency transactions made at the accurate price, and any potential non-efficient prices, are absorbed by currency traders. More directly; it will come from those willing to participate in the foreign exchange market for non-speculative reasons. Most of these non-speculators (tourists, importers/exporters, foreign investors, etc.) will loose in a purely financial sense on particular transactions (and some will win) relative to how exchange rates would behave without speculators. But they gain so much from having correct pricing signals, and this far outweighs their mere 'relative' financial losses - both for them personally, and for society as a whole. This makes the aggregate act of speculative trading (despite the huge losses suffered by many traders) a strictly positive experience for society as a whole.

In conclusion, currency trading has a positive effect on the global economy. And the moderate net wealth accumulated by all speculative traders (some more or less than others) is sourced from, and justified by this positive effect on global welfare from correct pricing signals.


Hope this helps and isn't too unclear.
Cheers,
Phillip
  • #9
  • Edited 11:47pm Jul 6, 2011 11:30pm | Edited 11:47pm
Hi Old Sly Fox,

You said:
Quote
Firstly, do you understand - at least to some extent - why we need fluctuating exchange rates? I'll just assume you do and keep this reply simple, as discussing why we need exchange rates is a very cool but lengthy topic.... In conclusion, currency trading has a positive effect on the global economy. And the moderate net wealth accumulated by all speculative traders (some more or less than others) is sourced from, and justified by this positive effect on global welfare......

Thank you for your explanation but could you elaborate a little more or point us to a book or article that explains why we need fluctuating exchange rates and how spot and futures forex traders (rather than commodity futures traders) contribute to ensuring that everything in the world (since everything is priced in USD, EUR, CHF, GBP or some other currency) is efficiently or fairly priced? Is this fair price contribution of traders called The Efficient Market Hypothesis and is there any difference between the contribution of the spot forex trader and that of the forex futures trader or are their contributions to efficient prices the same?
  • #10
  • Jul 7, 2011 2:59am Jul 7, 2011 2:59am
Quoting kuzco
This is a weird question I know but I ask myself this all the time.

How do professional traders and Hedge funds actually benefit the economy?

Do their vast profits really trickle down to the "little people"?
Benefits?

a) keeps clever psychopaths from finding new and more dangerous ways to scam or kill people.
b) ....
  • #11
  • Jul 7, 2011 4:02am Jul 7, 2011 4:02am
Quoting mbkennel
Benefits?

a) keeps clever psychopaths from finding new and more dangerous ways to scam or kill people.
b) ....
Smart answer.

Money is blood of any economy. Blood circulation is good for body. Money should make money. Don't keep your money under the mattress.
  • #12
  • Jul 9, 2011 5:38pm Jul 9, 2011 5:38pm
We are all part of the economy right? So if we make money, it benefits us and the economy as well since we're part of it. If we lose, the money goes into someone else's pockets, benefiting them or the economy.
  • #13
  • Jul 9, 2011 5:46pm Jul 9, 2011 5:46pm
There is definitely an intangible connection to the economy. The indirect relationship actually has a bigger effect than tangible connections imho.
  • #14
  • Jul 9, 2011 7:44pm Jul 9, 2011 7:44pm
I think it depends on who your taking the money from, and who the money is going to. If you take money out of the hands of the super rich....hedge funds, corporations, private investors who have way too much money etc...entities that tend to hoard money, and you put it into the hands of the smaller fish (like us retail traders), it benefits the economy because we are more likely to turn around and SPEND that money, on things like cars, homes, going out to eat more often, expensive gifts etc, which in turn benefits the economy. I see it as a sortof Robin Hood type scenario.

At least that is how I rationalize it.
  • #15
  • Jul 9, 2011 8:56pm Jul 9, 2011 8:56pm
I would actually say traders reduce manipulation more than increase it. A liquid market is alot harder to manipulate.

A flow on effect i have seen on the ground (in my country at least) in relation to currency trading recently is real money foreign exhanges for business/travel etc is becoming alot cheaper now as there is more competition to the dominant banks charging rediculous rates for foreign exchange. Forex brokerages are starting to pop up and are run by current and former currency traders.
  • #16
  • Jul 9, 2011 11:42pm Jul 9, 2011 11:42pm
Quoting Noloqy
The argument you'll hear from traders and market makers is that they provide liquidity, which in essence means that their activities reduce the cost of trading.
Yes this is the "economic purpose" of traders. This is why our governments let us gamble. Don't underestimate the importance of providing liquidity. If Toyota wants to hedge some cars they will be selling in the US, they would be in big trouble if there was nobody to take the other side of their trade. We traders take the other side of the hedgers' trades at a "fair" price.
  • #17
  • Jul 9, 2011 11:55pm Jul 9, 2011 11:55pm
It's not really a question of intrinsic economic value, it's more about deciding how much something is worth. As to whether this happens in a way which makes economic sense is a different question.
The breaking of a wave cannot explain the whole sea.
  • #18
  • Jul 9, 2011 11:59pm Jul 9, 2011 11:59pm
Quoting kuzco
This is a weird question I know but I ask myself this all the time.

How do professional traders and Hedge funds actually benefit the economy?

Do their vast profits really trickle down to the "little people"?

"Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks." - Karl Marx


Give the laborers just enough so that they survive and produce more labor. If they get more than their necessities, there will come a time they won't produce labor.

But if they do, we have this to balance the economy.


http://frugaldad.com/wp-content/uplo...as09152008.jpg
The Thief of Wall Street
  • #19
  • Nov 8, 2011 8:37pm Nov 8, 2011 8:37pm
Quoting global3
Hi Old Sly Fox,

You said:

Thank you for your explanation but could you elaborate a little more or point us to a book or article that explains why we need fluctuating exchange rates and how spot and futures forex traders (rather than commodity futures traders) contribute to ensuring that everything in the world (since everything is priced in USD, EUR, CHF, GBP or some other currency) is efficiently or fairly priced? Is this fair price contribution of traders called The Efficient Market Hypothesis and is there any difference between the...
I wanted to elaborate a little more, but my reply was turning into a book in itself.

I should also add a disclaimer - you're better off finding out for yourself than taking my word, as I'm just a fisherman.

Start with learning about purchasing power parity (PPP, this is the classical crux of the exchange rate argument), then move onto interest rate parity and the balance of payments. By the time you've got this far it should be easy enough just to follow your nose to any lack of understanding you may still have.

I my room, amongst a pile of other related material, is my original international economics text book - International Economics by Appleyard and Field (the newer ones include someone Cobb). This was my favourite text book and I'd highly recommend it - but almost any international economics text book will do. You'll need to search further to fill in any particular information gaps - or ask another question here, the more specific the better.

Probably should add few things to my first answer:

First of all, why we need traders is more completely answered when we compare the scenario I described to alternative exchange rate regimes (you'll understand if you read up on these ... after reading up on PPP, etc.). In particular, even though there are slight costs in terms of the payments-to-speculators with flexible exchange rates, the alternative regimes cost even more from either getting it wrong, or getting it right too slowly. Also, though some of the other regimes have rules guarding against speculation, speculators still operate on the sly, and in fact rape even more from society without providing any of the most significant benefit derived from their actions (that benefit being accurate exchange rates, derived directly from the actions these speculators).

Secondly, I described how there is an aggregate payment to speculators (weighted by position size) from their activities (if there wasn't then they must be wrong more often than right and therefore a costly hindrance to society, rather than a necessity with respect to accurate exchange rates). This was presented as if proof that traders benefit the economy. What needs to be made clear is that it relies on existing in conjunction with the assumption that the actions, or lack of actions by foreign exchange participants are voluntary. If you do a course on economics, learning about Adam Smith's invisible hand and Pereto efficiency, you'll come to understand the implications of voluntary participation, and how such a transaction may be neutral or beneficial, but never negative (baring negative third party implications - seldom an issue in financial transactions, more of an issue when considering things such as pollution).

Finally, I said nothing about hedge funds, futures, etc.. Well, these are all designed to factor in the risks of the time dynamic of international transactions. The mechanics and benefits of these financial assets are covered in text books such as the one recommended. In a nut shell, the creators of these assets are selling exchange rate risk cover, the buyers are covering exchange rate risk for future transactions, and traders are inadvertently adjusting the prices of this financial asset to efficient levels through the same basic mechanics and operating on the same basic principles as speculation in the forex spot market.

Sorry this was late. I don't get into forums much - something I'm hoping to improve on. Hope it helps
  • #20
  • Nov 9, 2011 12:33am Nov 9, 2011 12:33am
a good trader is an asset to any economy. it pays taxes(high), it consumes goods and services and doesn't need to stay on state welfare. the markets are not zero sum game. if there are so then the economy itself which contain all the markets is zero sum game. i think it's a stupid argument to say that every time you loose there's a man on the other side of the world who's making a profit from exactly how much you lost.
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