City & Business: No stopping shares
Sunday 23 January 1994
Something similar happened to the FT-SE 100 share index in the week before Christmas. Billions of pounds of stock was bought by a major Swiss bank so as to provide hedging instruments for a number of substantial pension funds. The market rocketed as a result.
Even ignoring these huge over- the-counter transactions, it is not uncommon these days for futures activity in equities to exceed the volume that's taking place in the stock market - to use the cliche, the tail is beginning to wag the dog.
Investors use derivatives because they are cheap, efficient, quick, provide a good hedge and, in some cases, avoid stamp duty. Many derivative transactions are also outside the Stock Exchange's control.
To some, however, it looks as if ballooning derivative trading has begun severely to distort movements in the underlying markets. Take that warrant transaction. Investors were buying the warrants as a bet on the mid 250 going up; when UBS moved into the market to cover the position, it became like a self-fulfilling prophecy, a case of the blind leading the blind.
Rubbish, say exponents, and even if this is true, does it really matter? If there were no warrants and other futures instruments available, investors would simply go out and buy the underlying stock instead. The effect would be largely the same: share prices would rise, though perhaps over a longer period of time. The equity market might seem to be at the beck and call of derivative traders, but in truth derivatives merely reflect what people think will happen anyway. Derivatives certainly cause short-term fluctuations but there's no long-term distortion.
Have the traders got it right? For the time being, investors seem intent only on driving the market higher. Good economic news is taken as evidence of recovery and shares move on to higher ground. Poor economic news is seen as evidence that the recovery is faltering and therefore another opportunity to cut interest rates; shares again move on to higher ground. It's become a case of heads I win, tails I win.
There's got to be something wrong with this no-lose logic. One day it's going to come unstuck, but for the time being it's hard to find an equity strategist who agrees. London still looks cheap against continental markets; shares will go higher before they go lower again.
Simon Calder looks at communities fighting back against the poachers
Guide dog mauled while helping owner deliver Christmas cards
Chemical and radiation experts investigate after death of man found inside tent in field
Nelson Mandela’s complex bond with Britain
The poorest pay the price for austerity: Workers face biggest fall in living standards since Victorian era
10 stone five-year-old taken into care
- 1 Turning up the voice of America
- 2 The poorest pay the price for austerity: Workers face biggest fall in living standards since Victorian era
- 3 The man who made Femen: New film outs Victor Svyatski as the mastermind behind the protest group and its breast-baring stunts
- 4 An obsessive’s documenting of Israeli war crimes in Lebanon can show us how the West lost respect for international law
- 5 Mass murder in the Middle East is funded by our friends the Saudis
- < Previous
- Next >
iJobs Money & Business
£42000 - £46500 per annum + Benefits: Pro-Recruitment Group: Big 4 Opportunity...
£300 - £350 per day: Harrington Starr: SQL Server MI Developer needed for Euro...
£25000 - £50000 per annum + Benefits + Bonus: Harrington Starr: C++ Server Dev...
£300 - £350 per day: Harrington Starr: Leading Electronic Trading Software Ven...