How exactly does this work? What are the mechanics of the actual trades taking place? i.e. where, who, settlement, etc. I can't seem to find any good info describing exactly how it works only about the passing of the legislature. Thanks
Say a pension, endowment fund or some other large wad of cash wants to invest in crude..say they have 5 billion to put into it.. Goldman, or Merrill, or some other IB creates an index for these investors, and then sells the index to the client, and then, to hedge the position, BUYS crude or whatever futures contract required. They have to 'hedge', right? Since the IB's are acting as AGENTS to the investors, the banks are classified as COMMERCIALS, and thus, have no position limits.. The swap loophole bullshit is all that needs to get closed for some kind of normalcy to be returned to the markets... This is manipulation and cornering at its finest...
Thanks so much for the clear and straightforward reply. I do, however, wonder how they handle the rollover from month to month. Forgive my naivete, but as these large institutions close positions as the current month comes to a close, wouldn't the price return to "normal" or "actual" levels. If we contend that prices of oil are "high" due to the scenario you provided, shouldn't there be a substantial decline in oil prices as that particular months contract nears expiration? All the best.
The major majority of trades are on ICE, which is a financial settled contract. No closeout needed. However, the contracts traded on NYMEX that get rolled are executed via a spread trade, thus there is no directional influence as there is equal purchasing size and selling size being executed.