Spot Market Esssay ⋆ Business Essay Examples ⋆ EssayEmpire

A spot market is a real-time market for the trade of commodities or securities, where the transactions are conducted instantly, in contrast with the futures exchange or the forward market, where a price is agreed upon for a transaction that will occur at a specified point in the future. The spot market, then, is the one that operates most like ordinary retail markets, with cash exchanged for goods “on the spot.” The spot price is the price for which something sells on the spot market, and is relevant in futures/forward trades as well as other considerations.

The internet and other technological advances have increased the importance of the spot market in commodities. Assets can be bought and sold repeatedly throughout the day, because of the lack of a need to take the time to physically transfer them back and forth. Even so, a delay is sometimes built into the way the market works: the spot market is especially huge in the foreign exchange market that has become the subject of such intense speculation in the last few decades, but on that market there is a two-day delivery date, a length of time originally chosen because of the time it took to physically deliver currency from one bank to another. Spot transactions are the second-most common on the global foreign exchange market, after swaps. Foreign exchange transactions are conducted with currency pairs: the transaction currency (the currency the buyer is paying in) and the counter currency (the currency that is being purchased), though this is somewhat a matter of perspective, since each party is both a buyer and seller.

The spot market has also become important to the energy market. Suppliers with surplus energy or natural gas can use the internet to instantly locate prospective buyers, negotiating prices—often almost instantaneously thanks to the algorithms in automated auction-style bidding systems (buyers can dictate ahead of time that they are willing to pay up to a certain amount for a certain quantity, without needing to be there to monitor the market, just as systems like eBay will increase the user’s bid as necessary up to a specified maximum bid). The energy can then be transferred to the customer within minutes of the surplus being identified, an extraordinary acceleration compared to the pace at which transactions transpired when trading floors were the only venue for spot markets. Some energy markets mandate spot price pools, which are independent exchanges that pool the bids and prices of various buyers and sellers in order to set fair values, with the goal of “clearing the market,” making transactions rapid and facilitating quick exchanges.

There is no single spot market for most commodities, and markets are less interlinked than stock exchanges. They can be privately operated, organized by industry agencies, or government operated, and may be available to the public, authorized brokers, or specific members, depending on the nature of the exchange and the commodity. Spot prices are generally publicly available, and affect other markets and exchanges by acting as a barometer by which the value of a thing can be estimated.

Though ownership transacts instantly, delivery and payment may be delayed some, depending on the market. As stated, foreign exchange has a two-day delivery; crude oil can have a delivery of up to a month; while energy delivers within an hour. In all cases, the spot price paid is the price set at the time of the transaction, regardless of whether anything impacts the value during that brief period before delivery.

Bibliography:

James L. Bickford, Forex Wave Theory: A Technical Analysis for Spot and Futures Currency Trade (McGraw-Hill, 2007);
Rob Booker, Adventures of a Currency Trader: A Fable About Trading, Courage, and Doing the Right Thing (Wiley, 2007);
Paul J. Devereux and Robert A. Hart, “The Spot Market Matters: Evidence on Implicit Contracts From Britain,” Scottish Journal of Political Economy (v.54/5, 2007);
Kathy Lien, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit From Market Swings (Wiley, 2005);
Wayne McDonell, The FX Bootcamp Guide to Strategic and Tactical Forex Trading (Wiley, 2008);
Anne Neumann and Boriss Siliverstovs, “Convergence of European Spot Market Prices for Natural Gas?: A Real Time Analysis of Market Integration Using the Kalman Filter,” Journal of Applied Economics (v.13/11, 2006);
David M. Newbery, “Competition, Contracts and Entry in the Electricity Spot Market,” Rand Journal of Economics (v.29/4, 1998);
Ed Ponsi, Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets (Wiley, 2007);
Dominick Salvatore, International Economics (Wiley, 2007);
Frank Sensfuss, Mario Ragwitz, and Massimo Genoese, The Merit Order Effect: A Detailed Analysis of the Price Effect of Renewable Electricity Generation on Spot Market Prices in Germany (ISI, 2007);
J. Stevenson, Filtering and Forecasting Spot Electricity Prices in the Increasingly Deregulated Australian Electricity Market (University of Technology, Sydney, 2001).

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