9.6.3-HEDGING AND OTHER OPERATIONS-TYPES OF SPECULATORS
Types of speculators
In any futures market the extent of speculative involvement can be high. The coffee markets are no exception. The New York market attracts the most attention, and longer-term speculative involvement can reach as much as 30% of the open interest. Day traders can account for an extremely large percentage of the daily volume.
are so-called because they always square their position at the end of each trading day - they never carry any long or short position overnight.
The day traders in coffee are referred to as 'locals'
as many operate for themselves. They take short-term positions (for minutes or hours) based on the order flow they see in the market and are well positioned to take advantage of price aberrations caused by other market participants. They will be prepared, for example, to deal at a few points under the market level if they judge that the distortion will be short-lived and that prices will return to their previous levels. Thus, locals can liquidate their contracts at a profit, although the profit may be quite small. Since the locals receive a beneficial commission rate they can repeat this operation several times a day.
Commodity and hedge funds
provide the greatest source of speculative activity and their financial power can greatly influence price movements. Funds operate on a variety of mathematical trigger mechanisms such as moving averages, trends and momentum indicators.
Over the years they have become more sophisticated in the complexity of systems they use and some now incorporate an element of in-depth market research within their strategies. The fund managers generally have a large portfolio of markets to trade and will therefore view coffee as only one facet in their total risk management. A hedge fund could lose in coffee and make profit in other non-related markets (such as bonds or currencies) to return an overall profit.
Professional coffee traders do not have the luxury of this diversification or the financial backing that the funds control and thus must be aware of the fund positions in the market in order to manage their own coffee books accordingly. Hedge funds normally take longer-term market positions.
coffee trade houses
large non-coffee related speculators
take strategic positions in the futures market. Such positions could be to anticipate a directional move or to take advantage of price differences between different market positions, for instance a discounted switch structure in the same market or an arbitrage between the New York arabica and London robusta markets.
operate in commodity markets that are likely to experience sudden changes in price and hence offer a greater profit potential. They tend to be guided by information and comments from second-hand sources such as bulletins published by brokers, daily newspapers and, more recently, information on the Internet. This category of speculators normally involves small investors, many of who rely on the advice of commission houses.
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