Jamesian Philosophy Refreshed

For those of my readers not familiar with the lingo of the financial world, let me begin with a definition of clearing and then of a clearinghouse. Clearing is the process by which transactions are reconciled, that is, money matched to the product or service it is purchasing. An institution that "clears" a transaction is also the institution that, in the first instance, runs the risk of default. Simple example: I make some large purchase with a check. The seller accepts my check in payment. In that case, in a common arrangement my bank would be the clearing party, and would bear that initial risk of default.  It is the bank, not the seller, and not in the first instance me either, who will be "out" if my check is in excess of my deposit account. In finance, then, a clearinghouse (sometimes written in two words as 'clearing house') is an institution that provides clearing and settlement services for commodities, derivatives, or securities transact...

The move of US exchanges into penny pricing in the 1990s is sometimes given credit for lessening something called a "spread," and thus to a degree the price of purchased securities. Let's pause on this point. The spread is the difference between the bid and ask prices at any moment: that is, the highest price that a would-be buyer has offered (that no one yet has accepted) on the one hand, and the lowest process that a would-be seller has asked for (with the same qualification, which I will hereafter drop) on the other. Books and articles and even blog posts that purport to teach you how to trade -- and this is emphatically not one of them -- will talk a good deal about which one of you should be the one to "cross the spread." It can all sound a bit like the musings of the wallflowers at a junior high school dance. As prices came to be quoted in smaller and smaller increments, there were (as the SEC expected there would be) greater opportunities for trad...

Thoughts in the manner of Hazlitt: Any commodity market is of necessity about hedging from more than one side, as well as about speculating. An industry that consumes a lot of energy (say, an electric utility) wants to hedge against the price of its supplies spiking up, just as the suppliers, in Texas or Saudi Arabia, want to hedge against the possibility of a sharp downward move. So the markets can serve both hedges. No: there is no reason why this should artificially drive prices up. Anymore than it artificially forces them down.   The risks of fluctuating crude oil prices will be borne by somebody. The risk exists, nobody other than an advocate of central planning believes that it can be ordered to go away. Somebody will bear it. Utility company, oil producer, speculators, or some combination. Under normal conditions, then, by letting speculators come in to play a role between the two hedging operational parties I have mentioned, commodity markets perfor...