Wednesday, November 10, 2010

CME Group Announces Money and Margin Requirement Increases

CME Group today announced a hike in the amount of money or margin needed to control a full-sized (5,000 ounces) silver contract. Margin for silver jumped to $6,500 from $5,000 or 30%.

Several things to know about this:

First, it is quite common to see this occur in markets that are undergoing sharp upmoves in price. The increasing price range can easily wipe out the entire margin amount in a single day with ease and this is designed to protect the integrity of the clearing houses and the brokerage firms. Customers who lose big cannot oftentimes meet margin calls and end up sticking the brokerage firm with losses. The idea is that the firms protect themselves by having more money at the clearing houses sufficient to cover potential losses.

Second – members of the exchange generally tend to be on the short side of a market moving higher and once they get trapped, they begin to squeak, and quite loudly at that. Squeaky wheels get the grease and since the exchange membership brings with it voting rights, they generally get what they want.

Thirdly – Small specs whose accounts are generally underfunded to begin with and who chase the markets higher based on the hype end up buying at relatively high levels. Once the margins get raised, these weak hands get forced out since they generally cannot meet margin calls and their exodus precipitates a wave of selling. That engenders more paper losses which then engenders more margin calls and the snowball effect occurs. (more)

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