I Read That the Oil Traders on Wall Street Make Huge Bonuses. What Exactly Is Oil and Commodity Trading?
Saturday, December 27th, 2008 at
9:13 pm
mike s asked:
How does it all work? I am a college student looking into investment banking, and just acquiring more information. What does it mean to trade oil? Is someone buying a barrel and betting on a change in price?
Tagged with: Commodity Trading • Oil Traders • Wall Street
Filed under: Commodity Trading
Like this post? Subscribe to my RSS feed and get loads more!
predicting the future price of oil and either purchasing or selling based on that anticipated price. For example, you can buy an option to purchase a barrel of oil on April 1, 2007 for $65. If the market price is $70 at that time then you’ve done well. If it is $60 then you have not.
A couple of sites with a lot of information…good luck.
Ha ha. Everybody on Wall St. makes huge bonuses. That is the American way. ***** the public and give huge bonuses. Wall St. and American businesses do that very well.
Those were the traders in the exchanges, literally, in the pits. There are contracts on all kinds of things, even rights for factories to pollute. These things are commoditized–uniform standards set, like so many board feet of certain kinds of timbers, etc. In the exchanges, there are representatives of the companies that own “seats” on the exchange. Usually, they are filling orders from brokerage houses. At any given moment there could be, say, ten people call in (or do so online) to say Buy 20 September. Usually, if there were also several who said in the same approximate time Sell 5 September, so the broker will often simply make the swap, so the pit trader is then told Buy 15 September contracts. He or she, in the midst of the fray will try to get a better price than current on the board above them. In the pit are also those from other brokerages doing the same, but there are also traders. These people will take it off your hands–for a price. But then they don’t have the reasons to have bought or sold that the previous contract owners had, whatever reasons or even lack of reason, that brings them to either want to acquire or get rid of those commodity contracts. So the trader will then look for a place to pass that hot potato–for a price.
So, in the market are people who simply fill orders and people who make money in the process. If your brokerage’s trader got the order to buy oil at 64 but the trader actually got it at 63.75, you may be charged 64, as you asked, but the trader made money in doing it. If it is your brokerage that executed the trade you may realize the difference, but if your brokerage was busy or farmed it out, hey an order for 64 is an order for 64, done!
There are people in the pits with doctorates in economics. There are people in the pits with degrees in philosophy and music. But the people in the pits are all superbly good at fast haggling with their hands (because of the noise they may yell what they want, but their hand signals rule).