CFTC's Shackling of Speculators Is Unlikely to Work

My column in Tuesday's Houston Chronicle on the proposed restrictions on energy trading by the Commodities Futures Trading Commission focused on the important role of speculation in the markets and the potential loss of liquidity that the new restrictions could bring. I also discussed the growing role of exchange-traded funds in augmenting speculative trading.

The Oil Drum's Nate Hagens goes a little farther, arguing that last year's price spike in crude wasn't a speculative bubble, but the result of a widening disconnect between financial instruments and real assets. In other words, the bigger problem has been too much money chasing too few resources.

Blaming the speculators, of course, is a favorite tactic for addressing rises in commodity prices. Back in the 1920s and '30s, speculators were blamed for rising prices, too, resulting in trading restrictions on agricultural commodities, many of which are still in place.

"So two wrongs make a right?" asked Craig Pirrong, the director of the Global Energy Management Institute at the University of Houston. "Seventy odd years of experience is basically being ignored."

Will reining in "excessive" speculation, assuming the CFTC can even define it, really reduce volatility in crude prices? Or will it have the opposite effect?

Disclosure: no positions

Comments

[JeffDB:]

Unfortunately, our nation, and this administration in particular, seems to either have a distorted view of economics or the politicians don't care and will pander to the masses even if they know what they want will be bad for them.

Jul 09 11:06 AM

[tuj:]

So why are position limits bad? Why should UNG control 25% of the prompt month long positions? Isn't that an excessive position? Especially when you add in their ICE positions, which they hold to avoid hitting their CFTC limits. Or are we going to allow more Amarath's and Hunt Bros. to try and squeeze and manipulate the markets?

The problem with the speculators, is that while they are a necessary and essential part of the price mechanism, when you combine ETF's and too many speculators on one side of the trade, it causes problems; the market becomes irrational. Witness UCR/DCR last year; simply too many people on one side.

Regulations are a delicate balancing act, but in and of themselves, they are not bad. Regulations are the same things that prevent insider trading (which I think we can all agree is bad) and other forms of deceiving the market. They don't always work and sometimes they are onerous, but they are unquestionably necessary. Let's hope the CFTC finds a good balance rather than simply railing against regulations.

Jul 09 04:39 PM