[wpietri]

It's a good question. Most markets have (or at least used to; I've been out of this a long time) a special class of speculator called a market-maker; they get discounted fees in exchange for providing liquidity. That way a seller doesn't have to wait around for a buyer.

Speculators in theory also provide liquidity, and in theory also contribute to keeping the prices "correct" (meaning at levels that reflect what's known). But it's not like any given speculator personally cares about that; they're just looking to gamble and win. Last I heard there was reasonable evidence that more gets spent on speculation than is delivered in benefits to the economy. So you suspicion is not unwarranted.

But there's another class of people who neither create nor consume the product, but have some financial interest in something related. E.g., suppose you sell farm equipment. You know that if wheat farmers have a bad year, you'll have a bad year, because they will put off buying your new tractors. To even things out, you can use wheat derivatives to essentially buy insurance on wheat prices. If wheat prices are normal, you lose a little money. But if they fall through the floor, you make money, hopefully counterbalancing the income from lost sales.

When this activity is significant enough, it can lead to the creation of synthetic commodities. E.g., if you are in the snowplowing business, maybe you want to insure against winters being abnormally snowy. You could maybe do something with a fuel oil future. But that's kinda tenuous. Instead now you can just trade weather futures: https://www.cmegroup.com/trading/weather/

[ashtonkem]

Minor nit: market makers typically aren’t there to speculate, they’re there to provide liquidity and make small profits per trade doing so. Most market makers try their best to trade down to no position overnight, since they don’t want to be long or short in anything.

[wpietri]

Thanks! Maybe the market maker I worked for was atypical. We definitely had opinions on where the market was going and made good money from that, especially in times of high volatility.

[twic]

It's hard to make money by pure market-making, so it's common for market-makers to also do some amount of speculation.

After 2008, banks were banned from speculating (ish) [1], but were allowed to do market-making. It's common for market-making desks to do speculative trades under cover of market-making activity. It's hard to conclusively prove that any given trade is speculation rather than market-making (which involves hedging), so they generally get away with it.

[1] https://en.wikipedia.org/wiki/Volcker_Rule

[wpietri]

Ah, yes. We were purely a proprietary trading firm. As my boss explained it, the traders who started the company brought a pile of money with them, and it was our job to make it a bigger pile of money. It was in some ways very pure; for my first year there we didn't even have the company name on the door. We already knew where the place was, and money spent on frivolities just meant less money to trade with.