Isn’t the wasteful, speculative, froth on financial markets just wonderful?

You don’t have to go far leftwards in economic debate to find those insisting that financial markets are just speculative froth. Things of no value extant only to enrich the bankers. A usual observation is that futures and options markets are many, many, times “real” trade and therefore we can stop all that froth. Tax it out of existence with a financial transactions tax perhaps.

And yet there’s a value to them even so:

For those worried that @ryanair might follow SAS, Qantas and Thai Air in hiking up prices due to soaring jet fuel costs:

MOL: "We're hedged for the ⁠next ​12 months out to March 2027 at ​about $67 per barrel, So it won't affect our costs and it won't affect ​our low fares."

Someone, somewhere, has to take the risk of aviation/jet fuel changing in price. As we can see we never really do know when someone’s going to launch a war of liberation for the inhabitants of an oil producing state despite our having had two just in the past couple of months. Or, OK, actions to etc.

Airlines typically - and yes, we’ve checked with Ryanair’s website on this - sell tickets a year out. So, someone in the system has to take that risk of fuel prices changing. It could be passengers. Book your ticket now but the price is unknown because there might be a fuel surcharge by the time you come to fly. It could be the company itself - the airline takes the risk of fuel prices changing in a year while setting prices now.

Or, of course, it’s also possible to have speculators take that risk. Which is how those futures markets work. People who actually want to gamble their money shift that risk away from consumers or the airline and take that risk onto their own books. Of course, if prices fall from now then we’re all, as the airline or passengers, out of luck. The profit accrues to said speculators. Or, if as is happening now, prices rise then it’s the speculators - who, nota bene again, have actively decided they’d like to carry this risk - who lose money and we passengers and the airline don’t have to worry about the change in oil prices.

That is, futures and options markets do have a purpose - they transfer risk. Given the number of people who trade in them, the number who actively seek risk and those who seek to lay it off, this is something a lot of people desire to do as well. After all, those futures markets are indeed many times the underlying physical ones.

Isn’t speculative froth in financial markets such a wondrous thing?

Tim Worstall