What is a Spot Market?
The spot market (a.k.a. physical markets, or cash markets) refers to a market in which buyers and sellers make an immediate exchange. The delivery and payment, in other words, occur at the same point in time. Currencies, physical goods, securities are all examples of commodities that can be exchanged through spot trading.
In this article, the Zero Theft Movement will provide a deep dive into spot markets, explain how they differ from futures contracts, and examine cases that might have contributed to the rigged economy.
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How Spot Trading Works
In the past, payments and delivery in spot markets truly happened at the same time. It often doesn’t work that way these days due to the rise of electronic trading and banking, particularly in regards to the official transfer of funds. T+2 in the stock market, for example, requires that trades be settled in two business days, so it’s not technically immediate.
Spot Trading vs Futures Trading
The futures market, on the other hand, deals with derivatives that are delivered at a designated time after the payment. Traders buy and sell futures contracts based on what they believe the asset will trade at later.
Futures contracts about to expire can also get traded through a spot market. This is because the delivery date and the time of purchase have neared the point where the buyer will receive the asset immediately.
Commercial Customers vs Speculators
Commercial customers spot trade (primarily buy) to acquire essential materials/commodities for their business operations. Airlines, for example, require significant amounts of jet fuel to run flights. Or technology companies might need to purchase various components to construct their devices.
Speculators, instead, use spot markets in order to profit from potential rises or falls in commodity prices. They do not have any intention to use the commodity itself. Take a speculator who has acquired a coffee bean futures contract. They might decide to close out that position by selling those contracts to Starbucks or some other coffee business in the spot market.
Spot Price
The current price of a financial instrument is known as the spot price. Buyers and sellers collectively generate the spot price by posting their orders. Meaning, spot prices often fluctuate. The spot prices of assets in liquid markets can change by the second, for example.
Exchanges and OTC
Both exchanges and over-the-counter (OTC) markets can offer spot trading and/or futures trading. The New York Stock Exchange (NYSE), for instance, allows traders to buy and sell stocks for immediate delivery. OTC markets refer to when buyers and sellers directly trade. The foreign exchange market (or forex market) refers to the world’s biggest OTC market, boasting an average daily turnover of $5 trillion. OTC transactions often have specific terms set by the buyer and seller of each trade, rather than a standardized set of rules.
Advantages and Disadvantages of the Cash Markets
Spot markets have a number of advantages and disadvantages.
On the positive side, trades happen immediately. The buyer gets the commodity they’re seeking, and the seller receives the payment right then and there (or just a few days later). Due to its immediacy, spot markets remain active and liquid. Funds do not get caught up in long-term investments, as they do in futures contracts. Furthermore, because the trade gets executed at the spot price, buyers and sellers know the real-time, true market prices at any given moment.
On the negative side, speculators may purchase commodities that require physical delivery. That coffee speculator mentioned above might have to store the beans somewhere until they can find an interested party. Also, investors cannot use the spot market to effectively hedge against the production or consumption of goods in the future. The derivatives market (includes futures contracts) proves much better suited for hedging than the spot market.
| Pros | Cons |
|---|---|
| Real-time market prices | Physical delivery for certain commodities |
| Active and liquid | Not effective for hedging |
| Immediate payment and delivery |
According to a National Employment Law Project report, “For decades, U.S. workers have seen stagnant wage growth despite rapidly increasing productivity, and the U.S. have reinvested less and less of their profits, now at a record high, into their employees, operations, expansion, and new job creation. Our analysis confirms this by showing an outsized share of corporate profits being spent on stock buybacks.”
Market Manipulation in Spot Markets vs Futures Markets
One final distinguishing feature between spot and futures markets is their relative security. Due to the immediacy of spot markets, they prove quite difficult to manipulate. The futures market, however, does not always remain so steady and secure.
For one, order book information gets released to the public. That means traders can see all of the various orders. They might act based on scheduled trading behavior. If many traders share the same ‘read’ on the order information, mass purchases or sales could happen, causing the market to shift accordingly.
In terms of security, the Securities Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) have brought a number of major cases in recent years. For example, we can look at the 2020 JP Morgan case in which it allegedly committed market manipulation in precious metals markets.
“…between April 2015 and January 2016, certain traders on J.P. Morgan Securities’ Treasuries trading desk employed manipulative trading strategies involving Treasury cash securities. The order finds that the traders placed bona fide orders to buy or sell a particular Treasury security, while nearly simultaneously placing non-bona fide orders, which the traders did not intend to execute, for the same series of Treasury security on the opposite side of the market. The order finds that the non-bona fide orders were intended to create a false appearance of buy or sell interest, which would induce other market participants to trade against the bona fide orders at prices that were more favorable to J.P. Morgan Securities than J.P. Morgan Securities otherwise would have been able to obtain. According to the order, after the traders secured beneficially priced executions for the bona fide orders, they promptly cancelled the non-bona fide orders.”
The investment bank reportedly paid $920 million to settle the charges.
Eliminate the Rigged Economy with the Zero Theft Movement
While spot markets have their advantages and disadvantages, they are undoubtedly secure. The spot price dictates the exchange between the buyers and sellers. Futures contracts, however, are much more vulnerable to natural fluctuations but also deliberate manipulation.
If bad actors manipulate the futures market, investors could be buying or selling based on false information. This would likely lead to profits for the manipulators at the expense of the investing public. Would you say that’s fair? Perhaps you have even been a victim of unchecked market manipulation…
We at the Zero Theft Movement are dedicated to finding and eliminating the rigged parts of the U.S. economy so that American businesses and citizens can flourish. Our community works to calculate the most accurate estimate for the monetary costs of corruption in the United States.
We achieve this collectively through our independent voting platform. The public investigates potential problem areas, and everyone votes on whether (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
Only through hard evidence can we prove where the rigged parts of the economy exist and force Congress to hold all the bad actors accountable.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.