To the vast majority of investors, the traded markets consist of stocks, bonds, options and commodities. Some also consider futures and foreign exchange, but the range of traded products is limited for most people. However, the fact is that anything which has a value can be traded. To those in the market, expressing everything as a trade becomes a habit. My wife quickly learned to interpret my habitual market speak. If I said “I pay” or “mine” she understood that indicated approval; a sudden “yours!” meant that I wasn’t in favor of broccoli casserole for dinner or whatever else was being discussed. This tendency to see everything in terms of a trade leads to markets being formed in some pretty obscure things.
Spread betting, where sports events are quoted in market terms, is now popular in the UK, but when I started in the foreign exchange market, it was in its infancy and not embraced by the public. Within the market I joined it was common. The most popular market at the time was in soccer tournament goals. This was purely a way that market participants gambled with each other. A price would be made on the total number of goals in the soccer world cup or other tournament. For example, if 64 games are scheduled for the tournament, the market may be 140-142. Traders and brokers would ask each other for a price in a certain amount per goal and trade. If you bought at 142 you would be paid the stated amount, maybe GBP10 per goal over 142 scored in the tournament. If it was under that total, you would have to pay the same amount per goal. As each game was played, the market would move and large amounts were won and lost.
A similar market in goals for the European soccer championship was instrumental in me being offered a job. I had a friend who was in the market and through him I had become interested in the goals market. I already had a position, but with little or no chance of hedging or cutting. At the end of my interview, when asked by the director if I had any questions, I asked if he would make me a price in European Championship goals in 20. He did, I dealt, and he told me later that that got me the job. It was obvious that I understood the way markets worked, giving me an advantage over other applicants.
Goals were a big market, but perhaps the biggest, and certainly the strangest, market made amongst London FX people was in party poppers, the small plastic party novelties that explode and pop out a streamer. I have no idea how or why this tradition started, but as the holiday season neared, the market was huge. The trick was to end up square. Whether you made or lost money, you did not want to either receive or have to deliver hundreds of boxes of the things. Even given that, on December 24th trainee dealers and brokers could be seen all over the City (London’s financial district) making delivery of huge amounts of poppers.
These novelty markets were fun, but there are other obscure markets that have a purpose. As the foreign exchange market became increasingly automated and the total number of jobs decline due to bank mergers in the 90’s and 00’s, so many of my erstwhile colleagues looked for other markets in which to ply their trade. A popular destination was the weather market. To many it comes as a surprise, but the weather, like anything else that is measurable and variable can be traded. Average temperature, rainfall and other weather related values for a season are bought and sold. This has real business applications. A utility company that would be hurt by an unseasonably warm winter may, for example, hedge against that possibility by buying contracts that would benefit from a warmer than usual season; an agriculture company may sell average rainfall to provide income in the event of a drought. As you can imagine, the possibilities are endless.
Some markets that seem strange to US investors, such as carbon credits, are familiar to investors in other parts of the world. In a cap and trade system, businesses that produce carbon emissions over a certain level are required to offset them by buying credits issued by the owners of undeveloped land that has a positive effect on greenhouse gasses, such as rain forest. I don’t want to get into the politics of climate change, but, again, this market provides a valuable service for those that need to buy and sell the credits as well as opportunities for speculators.
So, other than being fun for me, what is the point of this trip down memory lane? It is just that, as you study markets and pore over charts, don’t lose sight of the fact that there is nothing mystical or special about the secondary stock or bond markets. New issues of equity and bonds are an essential source of financing that enables businesses to grow. Once the securities begin trading on the secondary market, however, they are just like other traded things. They will respond to news that may indicate future value and to the basic dynamics of supply and demand. There are thousands of markets that exist, some formal, some informal and with varying volumes and liquidity. What they all have in common is that the basic aim of participants is the same…buy low and sell high and everything will be OK.