Tag Archives: options

Cboe Options Exchange to Extend Global Trading Hours for VIX and SPX Options to Nearly 24 Hours-a-Day

  • Expansion of current GTH session planned for fourth quarter 2021, subject to regulatory review
  • Will provide global investors the ability to trade Cboe’s flagship U.S. index options during local trading day and around the clock
  • Builds on growing customer demand, combined ADV for SPX and VIX options during current GTH session increased 76 percent in 2020 over the prior year

Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, announced plans to extend the global trading hours session (GTH) for its S&P 500 Index options (SPX) and Cboe Volatility Index (VIX) options to nearly 24 hours each business day on Cboe Options Exchange in the fourth quarter of 2021, subject to regulatory review.

Cboe’s move to offer a nearly 24 hours-a-day, five days-a-week (24×5) trading model aims to provide global market participants with expanded access to trade Cboe’s exclusively listed U.S. index options products based on the S&P 500 Index (SPX), the global benchmark of large-cap U.S. equities, and the Cboe Volatility Index (VIX), recognized as the world’s premier gauge of U.S. equity market volatility. The lengthened global trading hours are designed to help meet growing investor demand for the ability to manage risk more efficiently, react to global macroeconomic events as they are happening and adjust SPX and VIX options positions around the clock. 

“The S&P 500 and VIX Indices are widely tracked globally, with Cboe’s SPX and VIX options used by investors both domestically and internationally looking to trade, hedge or gain exposure to the broad U.S. market and global equity volatility,” said Arianne Criqui, Senior Vice President, Head of Derivatives and Global Client Services at Cboe Global Markets. “As financial markets around the world become more interconnected, it is crucial that market participants have the ability to trade products that meet their investing objectives when and how they need, no matter the time of day. Cboe continues to focus on broadening its geographic reach and extending access to its unique product set to investors around the globe to meet this demand.”

Cboe’s expansion of its GTH session is expected to complement its planned entry into the Asia Pacific markets, where it sees opportunity to further broaden its distribution network and offer a wide range of its core product offerings, including its proprietary products and global market data service, to customers in the region. On March 24, Cboe announced its plans to acquire Chi-X Asia Pacific Holdings, Ltd., operator of Chi-X Australia and Chi-X Japan. 

SPX and VIX options are currently available in a GTH session that runs from 3:00 a.m. ET to 9:15 a.m. ET. In 2020, the combined average daily volume (ADV) for SPX and VIX options during the current GTH session increased 76 percent over 2019. VIX futures are currently available in nearly 24×5 trading. In 2020, over 15 percent of total VIX futures volume occurred in GTH, up from 13 percent in 2019. 

The planned expanded GTH session would commence at 8:15 p.m. ET and run until 9:15 a.m. ET the following morning. Regular trading hours (RTH) then run from the U.S. market open at 9:30 a.m. ET until the market close at 4:15 p.m. ET. The RTH session will also be followed by a new curb session – an extra half hour session for electronic trading beginning at 4:30 p.m. ET– which will be added Monday through Friday in the third quarter of 2021. For each Monday business day, trading in GTH would begin Sunday evening.

The extended GTH session will not impact operations of regular trading hours on the Cboe Options Exchange trading floor in Chicago. For additional information on the extended global trading hours for SPX and VIX options, please click here.

ASIC bans the sale of binary options to retail clients

ASIC has made a product intervention order banning the issue and distribution of binary options to retail clients.

The ban will take effect from Monday 3 May 2021 after ASIC found that binary options have resulted in and are likely to result in significant detriment to retail clients.

ASIC reviews in 2017 and 2019 found that approximately 80% of retail clients lost money trading binary options. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics:

  • the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount;
  • short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and
  • negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment).

Commissioner Armour said, ‘Binary options’ product characteristics make them incompatible with investment or risk management use by retail clients. ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.’

ASIC estimates that retail clients’ net losses from trading binary options were around $490 million in 2018. The size of the market in Australia has since reduced significantly after ASIC issued a warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions. Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019.

ASIC’s binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of ASIC’s product intervention order imposing conditions on contracts for difference offered to retail clients.

The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

Background

A binary option is a cash-settled, over-the-counter (OTC) derivative entered into by two counterparties—the binary option issuer and the client. The ‘all-or-nothing’ payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product or a market index (for example, the price of gold increasing in 30 seconds) or an economic event (such as a central bank interest-rate decision).

Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power and how a product intervention order is made.

On 22 August 2019, ASIC released CP 322, seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from binary options and CFDs (refer 19-220MR). CP 322 attracted more than 400 responses from consumers, consumer groups, CFD issuers, industry bodies and other stakeholders.

On 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (refer 20-254MR). From 29 March 2021, ASIC’s order strengthens consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses.

In addition to the product intervention orders, ASIC’s actions to address concerns about binary options and CFDs include:

  • enforcement action to address misconduct
  • public warning notices and other statements
  • surveillance projects and thematic reviews
  • stronger regulations
  • extensive retail client education campaigns and guidance for binary option issuers.

More information about ASIC’s supervision and enforcement work is available on our website. ASIC’s Moneysmart website has further information about binary options.

Data Spotlight – US options volume nearly doubles over the last 12 months

Nasdaq leads single stock options market share; MIAX growing fast 

By Chris Mendelson

In February 2021, single stock options on US options exchanges reached a total volume of 572.4 million contracts, an increase of 91.3% from February 2020. That growth comes after a significant increase in the prior year, too, with a 51.8% year-over-year increase between February 2020 and February 2019. 

Before May 2020, single stock options on US options exchanges had never surpassed 300 million contracts in total volume. But every month since then has recorded more than 300 million contracts in total volume. Single stock options surpassed 400 million contracts in total volume for the first time in June, and in December volume topped 500 million contracts. The highest volume on record was January 2021, with 583.4 million contracts bought and sold on exchanges. 

On an annual basis, 2020 was a record year for single stock options volume, with 4.44 billion contracts transacted across the 16 exchanges that list options. This was a 68.1% increase from the previous record year of 2019 which was 2.64 billion contracts. The latter half of 2020 was the stronger half in terms of volume, with 2.56 billion contracts recorded and an 88.2% increase from the second half of 2019. 

Single stock options volume by exchange 

Nasdaq exchanges held 37.2% of single stock options volume in February 2021, by far the biggest market share and virtually unchanged from its market share last year. Among individual US options exchanges, Nasdaq PHLX held the biggest share with just under 13.3%.  

Cboe exchanges held the second highest market share as a group at nearly 24.8%, a decrease from 31.0% in February 2020. Its largest venue, Cboe Options Exchange, held about 10.5% of the market, placing it third among individual exchanges — down significantly from a 14.6% share last year when it ranked as the No. 1 single stock options exchange.  

NYSE exchanges held the third-highest market share with about 19. 6%, up from 17.1% last year. NYSE Arca held 11.3% of the market, ranking it second among individual exchanges and up from 10.4% the prior year when it ranked fourth. 

MIAX exchanges held the fourth-highest market share at 14.2%, up from its nearly 11.0% share last year and the biggest market share gain year-over-year. 

BOX ranked last in market share in February 2021 at just under 4.3%, though that was up from 3.5% in February 2020. Its sole venue, Boston Options Exchange, ranked 12th out of the sixteen US options exchanges. 

Global futures and options trading reaches record level in 2020

FIA released yearly statistics that show the total number of futures and options traded on exchanges worldwide reached a record level of 46.77 billion contracts in 2020, up 35.6% from 2019. Total futures trading rose 32.7% to 25.55 billion. Total options trading rose 39.3% to 21.22 billion. Open interest, which measures the number of outstanding contracts at a point in time, also reached a record high, reaching 987.3 million contracts at year-end, up 9.7% from December 2019.

This is the third year in a row that the global exchange-traded derivatives markets set a record in terms of total trading activity. As in past years, rapid growth on exchanges in Brazil, China and India accounted for much of the increase. An additional factor in 2020 was an explosion in retail trading of equity options, particularly in the US. Equity options traded on US securities exchanges jumped 52.4% to 7.47 billion contracts in 2020.

Not all sectors enjoyed an increase in trading activity. The interest rate category in particular suffered from a steep decline in both volume and open interest. Trading of interest rate futures and options fell to 4.15 billion contracts, down 13% from the record level set in the previous year, and open interest stood at 176.6 million contracts at year-end, down 19.6% from December 2019.

FIA’s statistics on volume and open interest are collected from 80 exchanges operated by 52 companies in 33 countries. The statistics are based on the number of contracts traded and/or cleared on these exchanges and are adjusted to avoid double counting.

FIA will hold a webinar on Jan. 27 to provide a more detailed look at global trends in futures and options trading. Click here for more information.
 

Regional Rankings

Exchanges in the Asia-Pacific region had the largest increase in trading in 2020. Total volume in that region reached 20.15 billion contracts, up 5.64 billion or 38.9% from the previous year.

North America, the second largest region in terms of trading volume, recorded 12.85 billion contracts traded in 2020, up 2.58 billion or 25.2% from the previous year.

Latin America, the fastest growing region in percentage terms, increased its volume by 2.33 billion or 56.9% to a total of 6.43 billion in 2020. Europe, which now ranks fourth, recorded 5.6 billion contracts traded in 2020, an increase of 567 million or 11.3% from the previous year.

Europe and North America continue to account for the majority of open interest. Total outstanding positions at year-end in the North American region was 515.9 million contracts, up 13.9% from the previous year, and equivalent to more than half of all outstanding contracts worldwide. Open interest in Europe stood at 209.3 million contracts at year-end, down 4.9% from December 2019, but equivalent to 21.2% of global open interest. Asia-Pacific open interest stood at 86.2 million contracts at year-end, up 8.2% from the previous year, but equivalent to only 8.7% of global open interest.
 

Category Rankings

Equity-related derivatives accounted for the majority of the increase in trading activity in 2020. Futures and options on equity indices, the largest category of the listed derivatives markets in terms of volume, reached 18.61 billion contracts traded in 2020, an increase of 6.15 billion or 49.3% from 2019. Futures and options on individual equities reached 9.9 billion in 2020, an increase of 3.8 billion or 62.3% from the previous year.

In the commodity sector, energy and agricultural contracts had the highest growth rates. The trading of energy futures and options rose 24% to 3.15 billion contracts, while trading of agricultural futures and options rose 45.4% to 2.57 billion contracts. In both categories, the majority of the growth came in contracts listed on exchanges in China.
 

Exchange Rankings

The National Stock Exchange of India once again came out on top in terms of total volume. The exchange reported total trading volume of 8.85 billion contracts in 2020, up 48.1% from the previous year. Brazil’s B3 continued its rapid growth, with total trading volume rising 62.5% to 6.31 billion. CME Group came in third, with total volume of 4.82 billion, almost unchanged from the previous year. Intercontinental Exchange came in fourth, with volume rising 23.6% to 2.79 billion contracts. Close behind was Nasdaq, with volume rising 49% to 2.66 billion contracts.

The OCC continued to rank as the world’s largest clearinghouse for derivatives. The OCC, which provides clearing for more than a dozen trading venues in the US, cleared 7.52 billion futures and options in 2020, 52.3% higher than the previous year, and open interest stood at 394.9 million contracts at year-end, up 31.8% from December 2019, and more than twice as large as any other derivatives clearinghouse.

5 Best Binary Options Trading Advice

In this world of high living cost, everyone is searching for side-sources of income to mitigate their everyday living expenses. Thus, Binary Options trading is getting popularity day by day, as it is apparent as a simple money-making source. 

While it is a relatively easy way to make money, it also takes a lot of practice, understanding, and a certain amount of responsibility. From this aspect, the binary options trading site Binoption is the best platform to learn every ins and outs of this trading type.

How To Reach Your Goal:

Many successful traders replace their past job with binary trading as they found it more profitable. Whereas some others often struggle with their trade because of some common mistakes and misconceptions. 

So, the first thing is to figure out those recurrent mistakes and clarify all misconceptions. Now, the question is how to reach the goal by avoiding all these hindrances.

Continuous Learning Process:

Successful options trading requires a continuous learning process. Though binary trading looks easy, don’t be fooled by its apparent ease.

However, you Should start from what is a binary options if you are just a beginner. And to stay up to date and gather more and more practical knowledge, you must have to study continually about the industry and the market.

For instance, Without the proper knowledge, a trading tool is just a trading tool for you with no use. But when you know how to utilize it, it’s no less than a powerful weapon in the trading field that is of great use. 

Yes, as simple as that.

Additionally, by using world news, you will have a better chance of making an accurate prediction. So, do not underestimate the importance of reading through a newspaper each day.

Moreover, you have to stay connected with other traders and professionals to increase your practical knowledge. And surely they will also advise you to start with little investment and grow your career little by little.

Market Analysis:

If you want to trade binary options with success, know that it’s all about predicting the directions and behavior of an underlying asset. And so you need to know how to analyze the market. 

With Fundamental analysis, you will know the macro factors, industry analysis, and other qualitative factors. And technical analysis is more about charts and charts patterns. Almost all technical analysis tools have a great impact on sound decision making of any trader. It helps to understand the market trends and trade more accurately.

On top of that, the performance of any financial asset is affected by the traders. This prevailing attitude of traders is known as market sentiment or market psychology. There is no way a trend is created by itself. Rather it is created by many deals that carried out by a huge number of traders.

Your trading strategy and selection of trading asset will be highly influenced by your market analysis. So, you can hardly avoid analyzing the market if you want to see the binary option as a successful attempt.

Besides, you may be forced to make swift decisions sometimes. So, you need to understand when to act fast and when to loss the bridle of your trade based on fundamental and technical analysis.

Trading Plan:

Without a proper trading plan, your trading career is nothing but a way to lose all your investment rather than a side income source. It’s a comprehensive decision-making tool for your trading activity that helps to decide what, when, and how much to trade.

On top of that, it will include strategies, personal risk management rules, trading goals, information on available capital, your attitude toward risk and other related information. Even, you can add your motivations for trading which help you to drag you forward. Also keeping all trading records on a trading journal is a must.

All of these are for easier trading and to make more objective decisions. By this, you will have more room for improvement.

Money Management:

Options trading is highly unpredictable. So, you should plan for a proper risk management strategy to avoid losing money. It paints a broader picture which encompasses your whole trading strategy for all trades.

Proper money management prevents traders from extra trading loss. It also increases the opportunity of the investment amount. As how you spend your money impacts your credit score and the amount of debt you end up carrying.

Set realistic Expectations:

As compared to other forms of trading such as Forex trading, binary options may seem incredibly easy. It is quite a bit simpler to understand than many other avenues.

That’s why most novice traders tend to set unrealistic expectations of getting rich overnight by trade options and become frustrated at the end. There are no shortcut methods of getting rich. You have to put your knowledge and hard work to become successful in trading.

Final Thoughts:

Trading requires lots of efforts. Never risk too much as it will make you quit trading just after starting. Try using all the available tools to improve your binary options strategy.

It’s never too late to learn a new skill. Maybe you are about to get the key to fulfilling your dreams. Make yourself a knowledgeable and skilled person, and that will automatically lead you to reach your ultimate goal. 

Technical Analysis USDJPY and EURUSD

Technical Analysis USDJPY and EURUSD

USDJPY is under pressure today breaking and the 113 level. The pair will rebound from current level as it has reached oversold level and the shorts will run for some profit taking.

EURUSD is trading today in positive bias again as dollar is under pressure. The pair reached the daily high t 1.0754 and i will stay bullish as long as the pair is trading above the 1.0715 level.

Support levels for EURUSD at: 1.0699 – 1.0686 – 1.0677
Resistance levels for EURUSD at: 1.0746 – 1.0763 – 1.0781

ATTENTION
The information is not an offer, no promotion, no consultation and no advice to buy or sell stocks, indices or currencies.  Trading stocks, indices or currencies is not only a chance, there is always a risk to lose money. Please only trade currencies if you are able to compensate possible losses. Please note that high profits always also contains a high risk. Please also trade with money that you dont need for daily costs.  Interferences with availability over the internet, availability of email deliverability or other software problems are further possible risks when trading with currencies
Disclaimer: Trading foreign exchange (“Forex”), Commodity futures, options, CFDs and SpreadBetting on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange (“Forex”), Commodity futures, options, CFDs or SpreadBetting you should carefully consider your monetary objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your deposited funds and therefore you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange, Commodity futures, options, CFDs and SpreadBetting trading, and seek advice from an independent advisor if you have any doubts. Past returns are not indicative of future results.

60 Seconds Strategy Binary Options

60 Seconds Strategy Binary Options

60 seconds strategy binary options is options, which have expiry time is one minute. It means, that you purchase option and already after one minute will have result.

 

Trade by 60 seconds turbo-options became so popular – and experienced traders and beginners work with it. Precisely this options allow to get ultrafast profit, and it size limited only by size of bet, that you made. For one minute you can win until 90 % from invest.

 

Minute binary options have their undeniable advantages: it’s possibility to trade in any time (session), carry out a lot of transactions for short time (increasing chance to win), unreal big selection of platform-brokers, which offer rather advantageous conditions (bonuses, big selection of assets, absence of commission).

 

You can use many strategies in trade by 60 seconds binary options, because they available for many methods. But approach, in any case, is a little bit different: you need to take decisions too fast, and instantly react on situation on market.

 

More information: FraudBroker.com – http://fraudbroker.com/60-seconds-strategy-binary-options/

Technical Analysis GBPUSD 9-8

Technical Analysis GBPUSD 9-8

GBPUSD made a break of the 100 hour MA to the downside and is moving away. The next target comes below 1.33 at 1.3296 which is the 38.2% of the move up from the August 29th low. The 1.3250 area is a confluence area where the 50% retracement, 200 hour MA and the low from Sept 2 all come together. The first support comes at 1.3309 and the second at 1.3296.

Resistance 1: 1.3357

Resistance 2: 1.3382

Resistance 3: 1.3405

Learn more about Forex Trend Trading

ATTENTION
The information is not an offer, no promotion, no consultation and no advice to buy or sell stocks, indices or currencies.  Trading stocks, indices or currencies is not only a chance, there is always a risk to lose money. Please only trade currencies if you are able to compensate possible losses. Please note that high profits always also contains a high risk. Please also trade with money that you dont need for daily costs.  Interferences with availability over the internet, availability of email deliverability or other software problems are further possible risks when trading with currencies.
Disclaimer: Trading foreign exchange (“Forex”), Commodity futures, options, CFDs and SpreadBetting on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange (“Forex”), Commodity futures, options, CFDs or SpreadBetting you should carefully consider your monetary objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your deposited funds and therefore you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange, Commodity futures, options, CFDs and SpreadBetting trading, and seek advice from an independent advisor if you have any doubts. Past returns are not indicative of future results.
This technical analysis is intended to provide general information and does NOT constitute the provision of INVESTMENT ADVICE. Investors and traders should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain investment advice specific to their situation before making any financial investment decision.
TCResearch guarantees neither the entirety nor accuracy of the analysis. Any consequent exposure related to the advice / signals which emerge in the analyses is completely and entirely at the investors own expense and risk. TCResearch is not responsible for any loss, either directly or indirectly, which arises as a result of the use of TCResearch analyses. Details of any arising conflicts of interest will always appear in the investment recommendations.

Options: Pros and Cons

Options: Pros and Cons

Pros:

Flexibility

Limited risk

Buying options limits your exposure. The maximum you can lose is the value of the option, the price you paid for it.

Purchasing options as a speculative vehicle offers limited downside — you cannot lose more than the price you paid for the option — and unlimited upside, at least on a call. If you purchase a put, your profit is technically limited to the underlying currency going to zero.

The cost of the option may be less than the margin on the same spot position.

Hedging

Cons:

High costs

Liquidity

You pay for the time value of an option. In spot forex, other than rollover charges (typically small), you do not pay for the time you hold a position.

Complexity

Time decay

 

How to Draw Trend Lines

Support and Resistance Lines

Forex Trend Trading

 

Stock Market Crash, A Historical Pattern?

Stock Market Crash, A Historical Pattern?

by Wim Grommen

Every production phase or civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

When we consider the characteristics of the phases of a social transformation, we may find ourselves at the end of what might be called the third industrial revolution. Transitions are social transformation processes that cover at least one generation (= 25 years). A transition has the following characteristics:

  • It involves a structural change of civilization or a complex subsystem of our civilization.
  • It shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other.
  • It is the result of slow changes (changes in supplies) and fast dynamics (flows).

Examples of historical transitions are the demographical transition and the transition from coal to natural gas which caused transition in the use of energy. A transition process is not fixed from the start because, during the transition, processes will adapt to the new situation. A transition is not dogmatic.

Four Transition Phases

In general, transitions can be seen to go through the S-curve, and we can distinguish four phases (see fig. 1):

  1. A pre-development phase of a dynamic balance, in which the present status does not visibly change
  2. A take-off phase, in which the process of change starts because of changes in the system
  3. An acceleration phase, in which visible structural changes take place through an accumulation of socio-cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. A stabilization phase, in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S-curve. In that case there is a fifth phase:

  1. The degeneration phase, in which cost rises because of over capacity and the producer will finally withdraw from the market.

 

Three Drastic Transitions

When we go back into the past, three transitions took place with far-reaching effects.

1. The First Industrial Revolution

The first industrial revolution lasted from around 1780 to 1850. It was characterized by a transition from small-scale handwork to mechanized production in factories. The great catalyst in the process was the steam engine, which also caused a revolution in transport as it was used in railways and shipping. The first industrial revolution was centered around the cotton industry. Because steam engines were made of iron and ran on coal, both coal mining and the iron industry also came into bloom.

This revolution ended in 1845 when Friedrich Engels, son of a German textile baron, described the living conditions of the English working class in The condition of the working class in England. The result of this revolution was an immense gap between rich and poor.

2. The Second Industrial Revolution

The second industrial revolution started around 1870 and ended around 1930. It was characterized by ongoing mechanization because of the introduction of the assembly line, the replacement of iron by steel and the development of the chemical industry. Furthermore coal and water were replaced by oil and electricity and the internal combustion engine was developed. Whereas the first industrial revolution was started through (chance) inventions by amateurs, companies invested a lot of money in professional research during the second revolution, looking for new products and production methods. In search of finances, small companies merged into large scale enterprises, which were headed by professional managers, and shares were put on the market. These developments caused the transition from the traditional family business to Limited Liability companies and multinationals.

After the roaring twenties, the revolution ended with the stock exchange crash of 1929. The consequences were disastrous culminating, in the Second World War.

3. The Third Industrial Revolution

The third industrial revolution started around 1940 and is nearing its end. The United States and Japan played a leading role in the development of computers. During the Second World War great efforts were made to apply computer technology to military purposes. After the war, the American space program increased the number of applications. Japan specialized in the use of computers for industrial purposes such as the robot. At present, computer and communication technology take up an irreplaceable role in all parts of the world.

The acceleration phase of the third industrial revolution started around 1980 with the introduction of the micro-processor. The third industrial revolution has clearly reached the saturation and degeneration phase.

Stock index graphs are fata morganas.

What does a stock exchange index like DJIA, S&P 500 or AEX really mean?

The Dow Jones Industrial Average (DJIA) index is the oldest shares index in the United States. A select group of journalists of The Wall Street Journal decide which companies are included in the most influential stock exchange index in the world.

Unlike most other indices, the Dow is a price average index. This means that shares with a high price have a great influence on the movements of the index.

The S&P index is a market value index. This index, compiled by credit evaluator Standard & Poor’s, includes the 500 largest US companies, based on their market capitalization

The Amsterdam Exchange Index (AEX) is the most important stock exchange index in the Netherlands. It shows the development of share prices of the top 25 funds of the Amsterdam Stock Exchange, based on trading. The AEX is the average price of the shares of those funds.




In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance.

An index is calculated on the basis of a set of shares. Every index has its own formula, and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs, which are, however, very deceptive.

  • An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. It is therefore very strange that different sets of shares are represented by the same unit.After a period of 25 years the value of the original set of apples is compared to the value of a set of pears. At the moment only 6 of the original 30 companies that made up the set of shares of the Dow Jones at the start of the acceleration of the last revolution (in 1979) are still present.Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

    Dow 1985 = (x1 + x2 + ……..+x30) / 1
    Dow 2014 = (x1 + x2 + …….. + x30) / 0.15571590501117

    In the nineties of the last century, many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed (which I think is wrong). An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990’s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the time I’m writing this, the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

  • The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition.This is actually a kind of pyramid scheme. All goes well as long as companies are added that are in their take off phase or acceleration phase. At the end of a transition there will be fewer companies in those phases.

Will the share indexes go down any further?

Calculating share indexes as described above and showing indexes in historical graphs is a useful way to show which the industrial revolution is in.

The third industrial revolution is clearly in the saturation and degeneration phase. This phase can be recognized by the saturation of the market and the increasing competition. Only the strongest companies can withstand the competition or take over their competitors (like for example the take-overs by Oracle and Microsoft in the past few years). The information technology world has not seen any significant technical changes recently, despite what the American marketing machine wants us to believe.

During the pre development phase and the take off phase of a transition, many new companies spring into existence. This is a diverging process. Especially financial institutions play an important role here. These phases require a lot of money. The graphs showing the wages paid in the financial sector therefore shows the same S-curve as both revolutions.

Investors get euphoric when hearing about mergers and take overs. Actually, these mergers and take overs are indications of the converging processes at the end of a transition. When looked at objectively, each merger or take over is a loss of economic activity. This becomes painfully clear when we have a look at the unemployment rates of some countries.

New industrial revolutions come about because of new ideas, inventions and discoveries, also new knowledge and insight. Here too we have reached a point of saturation. There will be fewer companies in the take-off or acceleration phase to replace the companies in the index shares sets that have reached the stabilization or degeneration phase.

In the graph below we see the share price/income ratio over the past two industrial revolutions. At the end of the 2nd industrial revolution in 1932 this index reached 5. At the moment we are at 15. The index prices can still go down by a factor 3.

Will history repeat itself?

Humanity is being confronted with the same problems as those at the end of the second industrial revolution, such as decreasing stock exchange rates, highly increasing unemployment, towering debts of companies and governments and bad financial positions of banks.

Transitions are initiated by inventions and discoveries, the knowledge of mankind. New knowledge influences the other four components in a society. At the moment there are few new inventions or discoveries. So the chance of a new industrial revolution is not very high.

History has shown that five pillars are indispensable for a stable society.

At the end of every transition, the pillar Prosperity is threatened. We have seen this effect after every industrial revolution.

The society’s Prosperity pillar is about to fall again. History shows us that the fall of the pillar Prosperity has always resulted in a revolution. Because of the high level of unemployment after the second industrial revolution, many societies initiated a new transition, the creation of a war economy. This type of economy flourished, especially in the period 1940 – 1945.

Now, societies will have to make a choice for a new transition to be started. Without knowledge of the past, there is no future.
Wim Grommen

 


Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last twenty years he trained programmers in Oracle-software. The last 16 years he studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines / sites in The Netherlands and Belgium.

You can contact Mr. Grommen at @DOWDIVISOR30

Futures and Options welcomes guest contributions. The views presented here do not necessarily represent those of Futures and Options.

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