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Are traders beneficial to markets (holy wall of text warning)

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Tekota
The Freighter Factory
#1 - 2012-05-11 08:57:00 UTC
This started as a reply to this thread, wherein the OP noted falling mineral prices and stated that he was now in dire trouble because his input pricing for the long build was locked in at old mineral prices. In my initial reply to that thread I said not to worry, the fundamentals were that every other producer was in the same boat and therefore prices of the end product will largely reflect their input pricing and not the current input pricing. I was wrong. Very wrong. (again).

Anyway, it all got a bit wordy and turned into thoughts about whether traders, more particularly speculators, are beneficial to an Eve market. The real world answer has always been that they smooth out bumps and dips in a supply chain - the cost of the coal to fire the power station changes day by day, minute by minute - but your electricity bill will keep the same kwh rate for months at a time; barrels of brent crude change price constantly, the cost to fill up your car may only change every week or so. Your electricity bill and your petrol bill will follow the trend of the fundamental fluctuations but not the individual bumps and dips.

In Eve, I'm not so sure. For one thing, in the real world, any major market dwarfs any individual investor or institution - there's not a trader on the planet who could purchase an entire day's global oil production. In Eve there are many hundreds of people who could purchase an entire daily volume of tritanium. Wallets are bigger than the markets.

Anyway, by way of illustration, seeing as it's what I mainly do, and what I was originally replying about - freighters. I'm not a particularly big manufacturer, but I'm hoping large enough to be reasonaly representative. I currently churn out four every 12 days. About 5b at any one time is tied up in minerals making components, another 5b is tied up making freighters from components, another 5b of end product is potentially sat in sell orders, and another 5b is needed on reserve to purchase the next batch of minerals. That's 20b before we even count the cost of the cap BPOs and a cash flow reserve, all to effectively make one third of a freighter per day.

It takes about 24 days between minerals going in and a freighter using those same minerals popping out. That is, once you stop producing it'll take 24 days to actually stop, and if you want to start it'll take 24 days before you see the first result. Once rolling, you're in for the ride and can't adjust course easily.

Freighter prices, as can be seen from the market graphs, plummeted not 24 days after mineral prices started tumbling, but immediately and sharply down to recycle value and lower (but not so much lower that it becomes attractive to do so).

In short, freighter pricing is determined by traders and not by manufacturers. I would hazard a guess that a lot of people were buying them during rising mineral markets as a mineral basket purchase. I would also hazard a guess that a lot of people purchased a number expecting a lot more freighters to be destroyed during burn Jita, the success of which turned out to be realised far more in people's behaviour than in outright carnage (though not belittling the scale of the carnage).

My heart sank a little when I saw someone trying to offload fifty obelisks through the Bulk Trade mail shot (at 1.3b each if I recall correct) just after Burn Jita; the price a trader needs achieve for his goods is determined purely by his purchase price (and acceptable loss/walk away margin) and the current recycle value - cost to manufacture has no relevance in these calculations whatsoever. In most instances this is beneficial - traders smooth out commodity values, ironing out bumps and dips in pricing brought about by variations in the fundamentals. When mineral prices started to rise in earnest this is certainly what happened - the batch of freighters I had out on the 14th December saw profits of only 30-40m each - this translated as a mere 890 thousand isk per manufacturing slot per day - freighter prices were restrained by traders despite rising mineral costs. I'm beginning to think however that once a market's valuation becomes solely determined by the traders, with no regard to the fundamentals, this might begin to be to the detriment of a smooth market.

I had four freighters come off the lines on the 6th of May. The charon in that mix was built using minerals 24 days earlier, and had a build cost (ME3) of 1.28b. Forge regional average of a Charon on the 6th of May - 1.21b. Another four come off in a week's time on the 18th May, the Charon in that batch has a build cost of 1.26b, Jita price today looks to be 1.19b. And another four come out on the 30th May.

Naturally, I account for such instances in my cash flow, always ensuring I can keep around 5b worth of stock hanging around. By the 30th May, when I'll potentially have 15b worth of stock hanging around, I certainly can't afford that sort of dent in my cash flow and as such will likely have to cease production for the batch scheduled to go in next week.

This is all sounding a bit whiney and it's not intended as such, I'll adapt, do something else and likely restart production when the market allows - but the long spool up time involved in production means that traders will not have smoothed a market but made it much more spikey. And speculators are drawn to spikey markets, potentially amplifying the effect further.
clixor
Celluloid Gurus
#2 - 2012-05-11 09:38:56 UTC
Nobody is forcing you to keep manufacturing stuff or to sell at a certain price for that matter.

If you see profitmargins being vaporized, logical course of action is to adapt, i.e. stop production of that particular type and move to a (more) profitable item. As supply is down prices will gradually rise again.

With the long manufacturing times you mention, you do have a choice, sell at a loss now, or sit on the product until it becomes profitable again.

Although the mins maybe influenced by traders, it's ignorant manufacturers who keep driving endproduct prices down by undercutting each other. So unless you run out reserves, i would just keep the products on the market at your targetprices, they will sell although it can take a while.
Thur Barbek
Republic University
Minmatar Republic
#3 - 2012-05-11 09:58:24 UTC  |  Edited by: Thur Barbek
Traders do not contribute to the market if you look at just the items and isk. However, im sure many nullsec entities could not exist without at least one trader supplying local markets. Non-station traders do more than buy and sell, they build and organize supply chains. Station traders do as you said and "smooth out bumps and dips in a supply chain." both of these types of traders are useful.

"In Eve there are many hundreds of people who could purchase an entire daily volume of tritanium. Wallets are bigger than the markets."

I highly doubt that. First of all, i can almost guarantee you only accounted for one regions trade volume. Jita alone has 28,698,700,000 trit daily volume.. Now add in amarr, rens, the rest of highsec... lowsec... and nullsec. Then consider that to buyout the trit, the trader needs liquid isk. There are very very few people with over a trillion isk in their wallet. Also consider that we are only talking about ONE DAY's trit. The market could recover within the month, and the guy with a couple hundred billion trit is now screwed.
Hammer Crendraven
Center for Advanced Studies
Gallente Federation
#4 - 2012-05-11 10:06:25 UTC
I have been thinking along these lines myself. We are trying to determine the real market of eve. Traders are not the real market.
They can try to corner a market and give you a false idea of the real market. Drive you out of buisness so to speak. Maybe with the end result to force the price up then supply that market for some length of time with their stockpile. How long you have no idea as the producer because you have no direct relationship with your trader. They do not place orders with you. It would appear that the traders only need to cover about a 30 day supply as that is how long it takes to restart an assembely line.
So perhaps you will want to keep a 30 day supply on hand as well then stop production. That way you can respond to demand to profit from it as needed while waiting for a factory line restart. Mean time find another product to make.
Hammer Crendraven
Center for Advanced Studies
Gallente Federation
#5 - 2012-05-11 10:13:36 UTC  |  Edited by: Hammer Crendraven
Thur Barbek wrote:
Traders do not contribute to the market if you look at just the items and isk. However, im sure many nullsec entities could not exist without at least one trader supplying local markets. Non-station traders do more than buy and sell, they build and organize supply chains. Station traders do as you said and "smooth out bumps and dips in a supply chain." both of these types of traders are useful.

"In Eve there are many hundreds of people who could purchase an entire daily volume of tritanium. Wallets are bigger than the markets."

I highly doubt that. First of all, i can almost guarantee you only accounted for one regions trade volume. Jita alone has 28,698,700,000 trit daily volume.. Now add in amarr, rens, the rest of highsec... lowsec... and nullsec. Then consider that to buyout the trit, the trader needs liquid isk. There are very very few people with over a trillion isk in their wallet. Also consider that we are only talking about ONE DAY's trit. The market could recover within the month, and the guy with a couple hundred billion trit is now screwed.


Um have you looked at the volume of trit in Jita for the last two days? It fell off a cliff. Jita is moving only about 8% of normal volume in trit over the last two days. So where has this demand gone? One would think another trading hub outside of Jita.
But no all regions around Jita have also droped volume to almost nothing. Not just trit but all minerals. Just as this guy making freighters is experiencing a slow down and mark down of freighters. He is inclined to stop production maybe lots of people are inclined to stop production, maybe lots of people have stopped buying minerals as well. Maybe demand for minerals has all but dried up. Interesting. This is far bigger than just this one guys observation. Markets all across eve are in a near stopage.
Mu-Shi Ai
Hosono House
#6 - 2012-05-11 10:26:12 UTC
I don't think speculators do anything constructive, but at the same time, I don't think your average trader in EVE qualifies as a speculator. I see my own function, and the function of most traders, to be that of spreading goods around the markets and getting them in the hands of other players. People who don't want to or can't sell the goods on their own, well, they sell them to me and then I do the end-selling for them to consumers browsing the market for modules. For this service, I extract a profit margin.

I see a big difference between what I do, however, and what a market speculator does. For example, I'm not trying to manipulate markets upward or downward in order to directly engineer, even against the market's own natural flow, an opportunity to extract profit. I think that when people start engaging in that sort of behavior, people with certain expectations of market flow (manufacturers, for example) can find themselves in a tough spot while they wait for speculators to finish their various manipulations and move along to other opportunities.

The big difference between EVE and the real world, as you mentioned, is scale. This economy is simply much more manipulable than the real world global economy. When people engage in speculation behavior, the ripples they create are larger, more noticeable, and they stand a reasonable chance of interfering in dramatic ways with other peoples' businesses. So yeah, I think there's quite an argument to be made that speculators are not beneficial to the markets. But I wouldn't go so far as to say that this applies to all, or even most, traders in the game.
Vaal Erit
Science and Trade Institute
Caldari State
#7 - 2012-05-11 11:09:05 UTC
You can't blame traders for your troubles. If you manufacture an item that has a long build time and you don't have a contract with someone to buy the item at a certain price you are taking the risk that in the future the item will not be worth what you want it to be.

Really, it is the responsibility of the manufacturer to look at current and future mineral values and volatility. When mineral prices are going crazy high you took a chance and bought high. You got burned. Fine. But don't start accusing others as being bad for the market.

Traders may not be beneficial to you in this circumstance but they are when mineral prices start to to go up and traders re-list items at current mineral price when you used old, cheap minerals. Traders are also beneficial to anyone in the market to buy a freighter.

And since when does anyone care about being "beneficial to the market"? I don't even know what that means. You are supposed to turn money into more money anyway possible under the rules of the game. Business 101
Orion Wyvernbane
Federal Defense Union
Gallente Federation
#8 - 2012-05-11 11:31:10 UTC
Traders are great for markets. Somehow they are able to provide freighters at below construction costs. Industrials can't do that.

By the way, that -is- smoothing the market from the point of view of someone buying a freighter.
Darth Tickles
Doomheim
#9 - 2012-05-11 11:53:54 UTC
A very well-considered argument.

"Traders" are beneficial to the market because they smooth the transition from producer to consumer, the distribution effect.

"Speculators", however, may not be, and precisely for the reason you suggested: relative market size.

When speculators act as information specialists, then they are agents who ensure prices best represent all the available information, which is good for the market. For example, the rise in the price of minerals through speculative buying.

In Eve, however, even a single speculator can influence key markets, the term that gets tossed around here is "market manipulation". This is very real, and in no way "good" for the market, as it creates artificial volatility, which in turn creates uncertainty for legitimate market actors.

That said, sowing chaos in the markets is one of the aspects of market manipulation that I enjoy, if not the most. The overall health of the market is not my concern.
Darth Tickles
Doomheim
#10 - 2012-05-11 12:03:44 UTC
Vaal Erit wrote:
And since when does anyone care about being "beneficial to the market"? I don't even know what that means. You are supposed to turn money into more money anyway possible under the rules of the game. Business 101


It's a legitimate "academic" or "philosophic" question.

A market is an artificial legal-political system for arranging human affairs, with advantages and disadvantages. Part of the justification for applying a market system in certain situations is that the myopic individual pursuit of direct benefit through economic profit is supposed to, through the mechanism of the market, benefit the collectivity involved in whatever good or service that market is regulating, even the "losers". Therefore, the question of whether certain myopic pursuits of profit do in fact benefit the whole through the mechanisms of the market is entirely valid, and has been a key subject of debate throughout the modern age, specifically because the political-legal arrangements are malleable and can be adjusted to improve the functioning of the market mechanisms.
Dangra Mu'zgob
Parasitic Trading Systems
#11 - 2012-05-11 12:14:20 UTC  |  Edited by: Dangra Mu'zgob
You're whining about evil station traders/speculators but let's say whole story:
If you're in freighter manufacturing business longer than for 1 month, technically you should be fine. In this case it would be correct to mention that you also had an oportunity to build couple of freigters using cheap minerals (bought before sharp rise of mineral prices ) and had oportunity to sell your freigters for higher price. Your losses should be covered...
EDIT: I don't want to sound harsh, but it's EVE - beautifull and cruel at the same time....

Trading for living / living for trading.

Alt of Shangra Mu'zgob

TheSmokingHertog
Julia's Interstellar Trade Emperium
#12 - 2012-05-11 12:32:01 UTC  |  Edited by: TheSmokingHertog
Hammer Crendraven wrote:
I have been thinking along these lines myself. We are trying to determine the real market of eve. Traders are not the real market.
They can try to corner a market and give you a false idea of the real market. Drive you out of buisness so to speak. Maybe with the end result to force the price up then supply that market for some length of time with their stockpile. How long you have no idea as the producer because you have no direct relationship with your trader. They do not place orders with you. It would appear that the traders only need to cover about a 30 day supply as that is how long it takes to restart an assembely line.
So perhaps you will want to keep a 30 day supply on hand as well then stop production. That way you can respond to demand to profit from it as needed while waiting for a factory line restart. Mean time find another product to make.


About the relationship between wholesalers / traders and producers, in EVE the end market is mostly in direct side of the producer. Within current real markets, that is almost never the case, producers are located in low cost area's and sales happen in high service areas. So when trying to setup contracts for the long haul with industrial's within EVE I encountered only retail prices. So say, I sell product X in Jita and buy it in Kor Azor from an industrial, he gives me a Jita price. The hauling, cash flow issues and invest risks he is not interested in. While setting up a Service Level Agreement I have just found few industrialists able to cope with the idea of risks and changing markets. Now I have several agreements for the long haul based on steady supplies to me, with a guaranty from me with a quantity of pieces of product X within Y time. This way the producers can sell the products to me on a predetermined rate, and the market risk is all mine. How would you encourage such systems within EVE?

And on a sidenote, dont producers have contracts with mining corps to buy at fixed prices? Or dont they get ores / minerals at buy prices...? Cant those profits be cut in towards retailers / marketeers.

"Dogma is kind of like quantum physics, observing the dogma state will change it." ~ CCP Prism X

"Schrödinger's Missile. I dig it." ~ Makari Aeron

-= "Brain in a Box on Singularity" - April 2015 =-

Aina Sasaki
Garoun Investment Bank
Gallente Federation
#13 - 2012-05-11 13:33:38 UTC
Good post. What you have said here describes why, thus far, I have not gotten into manufacturing (though there are multiple reasons for that, most involving skill points. x_x). As a trader, business is good regardless of what material costs to make items actually are. For the manufacturer however, situations like this arise where, due to events outside of your control, your operations may suddenly become far less profitable, or maybe not profitable at all. Though... I would think, and hope, that prices will balance out after a time so that they better reflect the material costs it took to make them.

We live in interesting times. :o

- Rei

Tekota
The Freighter Factory
#14 - 2012-05-11 15:40:15 UTC
Thanks for the feedback folks, interesting stuff.

To clarify a couple of points, the original post does sound a little whiney and isn't intended as such, it's merely observation, intellectual curiosity and all that good stuff. Personally I'll just roll around doing what interests me as I pretty much always have - Eve has long been a chatroom with added spreadsheet features :o)

Re the taking advantage of the good times (ie. you got the benefit when prices were rising) in practice it hasn't really worked out that way. First freighter rolled off the lines on the 4th August 2011. Since then I've made 61 with another 8 in various stages of build. At the peak of the accelerating mineral prices I had a batch of four on the 12th April that sold for between 238 and 265m profit each which equated to a profit per slot per day of 6.2m. Of the 61 freighters produced thus far, total profit has been bang on 6b - ie. average of about 100m per freighter.

Probably worth noting that I've always maintained that freighter production in particular has abysmal profits and should never be entered into to get rich quick, but more as something that once rolling is a very low impact activity - requiring nothing more than three or four hours ferrying once every 12 days - in return for that you get around 3m isk per slot per day on average.


And as Tickles notes, something being "bad for a market" does not necessarily mean "bad for the game", quite the opposite being the case in many instances, and quite likely this one too.

My only real concern about the effects on the game would be that I'm not sure this effect would be self correcting in the same way as other pricing issues. Rising mineral prices has a self correcting mechanism - rising minerals means increased mining means lowering minerals; increased competition means lower profits, means lesser competition etc. In this instance the effects of speculation means fewer manufacturers, means a spikier market, means more speculation - the more speculation there is the more a market becomes attractive to speculators. With a 24 day spool up time there doesn't exist the possibility for manufacturers to restart production to rapidly respond to demand and take advantage of a gap.
Pinstar Colton
Sweet Asteroid Acres
#15 - 2012-05-11 16:26:03 UTC
There are two kinds of traders in my eyes, Station only traders...who never, ever undock and merely buy and re-sell items on the market (and possibly items in other stations in the region using the trader skills) and traders who buy, haul and then sell for a profit.

The station only traders help level out the peaks and valleys in price, keeping the relative price of a good steady. That isn't to say large shifts in supply or demand can't uproot an established price point, but it is the role of station traders to keep the peaks and valleys in check (and profit from doing so).

Hauling traders fulfill a logistical need of the market. 1 billion trit, while valuable, is useless if scattered across 25 different systems and held by 100+ different people who want to sell it. The hauler helps smooth out the peaks and valleys of prices across distance, connecting supply with demand and profiting from the difference. It is because of them that the 1 billion trit can be brought to market properly and thus supply a manufacturer who needs materials on that kind of scale.

Without station traders, the price of a good would swing wildly, even without being pressured by outside supply and demand. Depending on the price of a good for your business would be harder if you suddenly had to buy more of it and found that the price was up 20%.

Without haulers, the markets would have difficulty supplying anything in bulk, and the availability of more niche products would be very sporadic.

In the cat-and-mouse game that is low sec, there is no shame in learning to be a better mouse.

Vaerah Vahrokha
Vahrokh Consulting
#16 - 2012-05-11 16:47:13 UTC
Tekota, traders are a market facilitator, they provide liquidity to they system and reduce spreads.

Your issues come from the lack of hedging. You are going long today on minerals and short weeks laters on freighters.
This is similar to a currency pair trade.
As long as you are going with the trend (as they say "the trend is your friend") your long operation brings in manufacturing profit + trend induced price shift profit.

If you go counter trend like now, your long operation brings in manufacturing profit - trend induced price shift profit, which may easily cancel each other or even result in a loss.

There are 3 ways to avoid this loss:

1) Analyze the price swings on a weekly chart. You want to buy while "in the green", particularly after a price action pattern. Weekly price action patterns are quite powerful and easily last the full duration of a freighter production.

2) If this was RL, you could just buy anti-cyclical or any sort of "inverted trend" securities so that whatever happens to minerals prices the other security will act the opposite way. This way you always have the manufacturing profit saved (but will give up on the trend induced profit of course).

3) If this was RL or wanted to set up a serious deal with a supplier (possible in EvE but would require some trust), you'd just buy minerals futures contracts. This way you have a fixed and certain minerals price that will not change whatever the underlying markets do.


Darth Tickles wrote:

In Eve, however, even a single speculator can influence key markets, the term that gets tossed around here is "market manipulation". This is very real, and in no way "good" for the market, as it creates artificial volatility, which in turn creates uncertainty for legitimate market actors.


This is why I usually take profit in a quite conservative way. I.e. I dumped isotopes at 1100, because past that level the market -20% volume and the swings angle say it's "running on fumes" and I prefer to sell before it's just manipulators left in that market, ready to dump any time.
Kara Books
Deal with IT.
#17 - 2012-05-11 16:58:26 UTC
Wow, these threads lol, the lightminided are taking it seriously.

Market cannot exist for the players by the players without traders.

the way Im seeing your post (intentions thoughts etc)
Hence you are suggesting we legalize Bots, if you cant have them (or the friends you socialize with) then the final outcome should probably be all NPC orders, similar to that of SISI servers.

once again, NOT both but either or, just to be crystal clear.
Maxpie
MUSE LLP
RAZOR Alliance
#18 - 2012-05-11 16:59:27 UTC
Interesting topic. As a corollary, I recently was reading that airlines face essentially the same problem the OP describes. Apparently airlines enter fuel contracts months in advance to lock in favorable prices. Others have actually purchased refineries in order to have a stronger control of fuel prices.

I'm not of the opinion that this is some kind of problem with Eve per se, but it is an interesting subject of discussion.

No good deed goes unpunished

Wukulo
Brutor Tribe
Minmatar Republic
#19 - 2012-05-11 17:24:47 UTC
This is a pretty dumb question to be blunt.

If we didn't have traders, no one could sell any mission loot or moon goo or mined minerals or anything at all.

There are no NPCs to just dump your stuff into to get ISK.

Posted on main because I'm not a coward like the rest of you.

Lauren Hellfury
Full Pocket Aggro
#20 - 2012-05-11 17:28:00 UTC
Oh look. Someone that only read the thread title.


(I'll be back in a bit when i've had time to formulate a coherent and concise response)

Help rid New Eden of T2 BPOs: ** https://forums.eveonline.com/default.aspx?g=posts&t=62797 **The Full Pocket Aggro blog:  http://fullpocketaggro.blogspot.com/ **Now showing: **Margin Trading Scams

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