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Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Silver Margin Hikes
I wish to clear up a misconception floating around that the CME has hiked margin requirements on the main silver contract. It has not. Margins were raised on silver intramarket spreads, not the main 5,000 ounce silver contract.
Margin requirments for the full sized, 5,000 ounce contract remain the same as last month (Jan 20) when they were raised to $11,138 from $10,463 for initial margin.
The previous hike in margin rates for silver occured last year (Dec 16, 2010) when they were raised to $10,463 from $9,788.
Prior to that, margin rates on these full sized silver contracts were raised Nov 16, 2010 when the initial margin requirement was raised to $9,788 from $8,775.
I will keep the community updated on any subsequent margin hikes in silver or in gold.
DAN, thanks very much for this information and Your blog. Fantastic.
ReplyDeleteWonder, what happens to our tiny silver retail spot market, if things on the COMEX implode oder explode (As described by James Turk, Harvey Organ and Jesse's latest comments....).
And how soon and how fast the action may destroy us. Heinz from Hamburg Germany
Great clarification to make. People are busy reading the headlines and the headlines never say what margins are being hiked.
ReplyDeleteThere are just too many headlines to keep up with. Can you explain what "intramarket spreads" are and why the margin requirements are different?
ReplyDeletehttp://www.trading-naked.com/library/Bonus%20Future%20Spread%20Trading.pdf
ReplyDeleteArticle Joe Ross
To add to what flaunt asked - How this will affect the price of silver going forward and who will this affect?
ReplyDeleteThe exchanges generally will increase the size of the margin requirements whenever they determine that a particular futures market is seeing an increase in volatility. The reason is ostensiblyto preserve the integrity of the clearinghouse. For example - let's say that the margin requirement for a full sized silver contract was $6,500. Someone takes a short position in silver and it moves up over $1.00 in a single session. That individual has just suffered a paper loss of $5,000+. Their margin is just about wiped out. Each evening the clearing process adjusts the balances of all trading accounts in which silver positions are present. Some are credited; the other half are debited. What happpens to the clearinghouse if the account from which the money is debited has insufficient funds to credit an account on the opposite side? IT is obvious that the very financial stability of the system requires enough funds to prevent this. After all, trading is a zero sum game. The losers pay the winners.
ReplyDeleteThe exchanges can abuse this however since most of the members of the exchanges, the ones that the enormous fees to obtain a voting seat on the exchanges, more often than not, tend to be on the short side of a market if it is in a bullish trend. When they get trapped, they squeal or squeak loudly and the squeaky wheel generally gets the grease.
One last thing - intra market spreads are positions in which a long leg in one contract month is taken against a short leg in another contract month for the same commodity. For example - someone might be long March Silver and short December silver. They are playing the backwardation or contango situation and hoping to make some money as the supply/demand situation changes. It is generally considered much less risk and therefore requires substantially less margin than an outright long or short position. that is why the margin requirements are lower.
Spread margin hikes generally have little effect on the underlying futures contract.
Thanks for explaining Dan.
ReplyDeleteSo let me see if I understand correctly. In a rising market it is mostly the shorts who would be hurt by a margin increase required to balance out the accounts. Conversely, the longs would be hurt most in a declining market.
Sometimes though, the margin requirements are increased at a rate that forces long side liquidation in order to help out the shorts.
I feel like I'm still missing something though. Clearly raising margin requirements disproportionately affects the longs as we all witnessed last year when silver almost touched $31 intraday and closed under $29. Is that because the new positions were undercapitalized?
Flaunt - it generally hurts the speculators more because they tend to be undercapitalized. Nowadays, the impact is not as great as it once was mainly because the trading contingent that drives today's markets is the hedge fund community, or managed money, and they are extremely well capitalized, especially those who are plying a Dollar carry trade or even using the Yen as a carry not to mention the super low interest rate environment which makes borrowing costs for hedge funds very low.
ReplyDeleteThe margin hikes hurt the small specs, those with small trading accounts the most and will oftentimes force many of them to sell, particularly if the market moves against them for a brief period.
Dan, thanks a lot for clarifying this margin hike and spreads! Great blog.
ReplyDelete