Another piece of news in today’s Financial Times designed to restore our faith in the efficiency of financial markets. It turns out that last Tuesday’s big spike in oil was caused by one man, Steve Perkins, a “rogue trader” purchasing a huge number of Brent Oil futures contracts in the middle of the night. When other traders staring at their screens saw the rising prices, they jumped in, bidding oil up to the highest price of the year. In one hour, Perkins all by himself traded as much oil as Saudi Arabia produces in a day.
When introductory finance textbooks explain the function of futures markets, they use the homely analogy of a farmer, fearing a drop in wheat prices and a bread maker fearing a rise. To lock in their tight margins, the farmer and the bread maker get together, agree on a price for future delivery. That way each can proceed to harvest and bake, without worrying that conditions out of their control will make all their hard work unprofitable. What could be wiser, what could be more efficient, what could be farther from the truth of modern futures markets.