Why is the price of asset so fluctuating?
Is it because of speculative day-trading investors?
The article of <Newsweek> in 2010, mentioned about volatility saying, "By trading vast amounts of stock at warp speed, as many as a billion shares a day, high-frequency traders gobble up fractions of cents at a time. The more volatile the market, the easier it is for them to make money jumping in and out of stocks across exchanges."
Well, does high-frequency trade affects on the volatility on the market? Ken Fisher, CEO of Fisher Investments, indicates volatility during the Great Depression. The stock market was moving upwards and downwards frequently. The reasons for market surge and stumble in short period of time were various; one of them was regarded as lack of liquidity. There weren't that many listed stocks in the market and the trading volume wasn't abundant. Information was delivered much more slowly, which hindered the fast recovery of price. Markets with low trading volumes are usually highly volatile due to insufficient liquidity and supply.
Futures traders are often referred as speculators because they bet money on future prices. There are countless reasonable motives to have future trading deals. Firms use futures contracts to stabilize the cost of purchasing in response of highly volatile commodities. Airlines buy oil futures to stabilize operating costs. Farmers use future tradings to purchase agricultural manure or compost.
Why is onion future price so volatile
If you are curious about a market without speculation, just looking at the onion future market is enough. In 1958, onion farmers claimed speculators were slashing the price of onions. Michigan Congressman Gerald Ford, who later became president of United States, believed in this claim and banned futures contracts for onions. In fact, Ford was the one who has believed in the free market. This ban is not abolished and still exists today. Ford and the farmers did not understand that speculators were contributing to providing liquidity to the market. They didn't even know that their market participation actually makes volatility less.
Onion vs Oil
If you think oil future has heavy volatility, please refer to the chart below. Onion prices fluctuate more frequently than oil prices. The range of fluctuation of onion is even greater. If the price volatility was so high, speculators would need to be invited back to the market to reduce volatility. It is foolish to ban speculation just to protect farmers.
Speculation in forex market
The exchange rate must have a sufficient amount of supply and demand to determine the appropriate exchange rate in the foreign exchange market, which is determined purely by market function, and speculative foreign exchange transactions must exist in order to secure such demand and supply. If speculative trading is prohibited and only underlying transactions are made on demand, the size of the market will not reach a certain level and as a result, the foreign exchange market's exchange rate may be distorted or the exchange rate-setting function may be lost.
For example, lets presume that only underlying transaction is on demand. When the demand of dollar is 2 million and supply is only 1 million, the currency rate will soar up in need for more supply, which will make Forex in extreme volatility. However, when speculative transaction is traded actively, then the supply problem will be hugely diminished.
Please refer to the blog here:
https://techongstudy.blogspot.com/2020/08/what-is-exchange-rate-and-forms-of-it.html
Source: Market Never Forgets (Ken Fisher)
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