Speculators Bigger Players in Futures, Options Markets Than Thought 8 comments
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Speculators hold 49% of oil futures and options contracts, much more than the 38% previously thought, The Wall Street Journal reports here. The impact graphs in Ann Davis' Aug. 15 story:
The scale of the recent revision and questions about the reliability and transparency of data in this market are feeding into efforts by Congress to impose restrictions on energy trading. Four Democratic senators on Thursday called for an internal CFTC inspector-general investigation into the timing of a July 22 release of a report led by the agency. That report concluded speculators weren't "systematically" driving oil prices. Oil prices soared until mid-July before beginning a decline. A letter by the senators asks why the report was released before full reviews could take place of trader information the agency only asked for this summer. Also at issue is whether the report played down speculators' influence, notwithstanding the report's finding that "the positions of non-commercial traders in general, and hedge funds in particular, often move in the same direction as prices."
In other words, the CFTC's taskforce report doesn't deserve the credibility that the futures industry and institutional speculators like pension funds and hedge fund operators are giving it. Most important, the Journal reports,
Lehman Brothers analysts say the CFTC data, as they are now reported, fail to distinguish certain categories of financial traders from commercial traders and create "an opportunity for the activity of less-informed, purely financial investors to distort expectations."
So, until the CFTC's Sept. 15 report becomes available, there is no way that the futures exchanges or its members can deny the disruptive roles of institutional speculators in the futures markets. Indeed, the public comments by many hedgers strongly indicate that institutional speculators have been and are disrupting those markets. Note, also, that the Journal for the first time refers to institutions as speculators, not as "investors." There are no "investors" in the futures markets, only speculators and hedgers.
The debate, then, is whether large institutional speculators will have to play by the same rules as other speculators. The reason that they're distorting the market is that they are exploiting loopholes in the rules that allow them to trade more than smaller speculators and to trade off the exchanges. The loopholes are designed to make Wall Street's brokers who hedge the institutions' off exchange swaps bets on commodites on the futures markets incredibly profitable.
That those loopholes are approved by the CFTC has made that regulator extremely defensive when it comes to investigating the roles of institutional speculators in the futures markets. The Journal's latest report supports my posts yesterday, which are here and here.
If Congress forces the CFTC to impose new trading limits on institutional speculators in the futures markets, how will that affect companies like the CME Group (CME), which owns the Chicago Mercantile Exchange and Chicago Board of Trade? CME is in the process of buying Nymex Holdings (NMX), which owns the New York Mercantile Exchange where most energy futures contracts are traded. And how would the new limits affect brokers like Goldman Sacks (GS), JP Morgan (JPM) and Merill Lynch (MER)? Their daily charts are here.
Yesterday's post on futures speculators is being discussed on Seeking Alpha here.
Full disclosure: I have never had a vested interest in the futures industry, and I don't trade futures or options on futures contracts. I own JPM.
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This article has 8 comments:
> jack
The non-transparent OTC commodity "market" dwarfs the exchanges, thus CFTC data in any way shape or form is misleading. Randomly querying the street for commodity information accomplishes nothing. Either commodity OTC markets become globally regulated under the CFTC and FSA, for example, and be required to "clear" through an exchange or the world risks another debacle rivaling subprime mortgages.
Financial Markets Have Leapfrogged CFTC.
Financial Markets Have Leapfrogged CFTC.
You may not like that the price of oil (or any other commodity) is higher than it used to be but that doesn't mean that it does not reflect its current value.
Just like some people say these speculators are keeping the price of commodities like oil high, regulation would create a quasi-artificial price ceiling and keep the price lower.
Regulation is clearly not the answer if price integrity is your goal. (It certainly might be if all you want is a commodity like oil trading at a lower (and probably incorrect (in terms of intrinsic value)) price.
It is true - "the market is the market". However, a commodity is finite and money/currency is elastic, therefore money can "chase" an asset like a BULL in a china shop.
Without market transparency, i.e. Exchange cleared commodity trading, we simply "don't know what we don't know".
Speculation and free markets are what makes the world go round, both fear and greed. Manipulation is, however, is extremely destructive.
WHO IS BEHIND THE CURTAIN?
The Congressional hearings held some weeks ago with the CFTC, Traders, University Professors, CME, ICE, etc. concluded that commodity exchanges are functioning properly.
ALL issues regarding margin requirements and investment limits by speculators, pensions, etc were VETTED. It is EXTREMELY unlikely there will be any HEAT put on the CFTC regarding additional regulations for exchanges. The Congressional Committees fully understand that margin requirements are to protect the exchange's risk and increasing requirements is a penalty/tax on commercial users, if set higher could have unintended consequences. Furthermore, changing speculator limits could also lead to problems.
Congress may bark at the CFTC but they are not going to BITE! Demanding exchange changes would be construed as "manipulation". All of Congress may not understand this - but the Committees that ultimately control agriculture, banking and finance absolutely understand this.
The testimony by the CFTC, and industry led to OTC trading as being the the big Boogy Monster! In fact the CFTC does not have any CLUE what is going on in OTC and could not give Congress a full and balanced report. CFTC also looks even worse since the commodity driven OTC market dwarfs the exchanges.
Congress understands further regulation of the exchanges will simply drive commodity transactions off the exchanges!
REGARDING OTC markets: Investment banks are trying to stall Congress by presenting a report called: "Containing Systemic Risk: The road to reform" www.crmpolicygroup.org...... .
The report points out the gravity of the OTC problems and promises to have them fixed in 2 years.
If CME/NMX deal happens the combined company will be able to take all the future OTC business and clear it immediately, providing a solution for the CFTC via transparency that will enable CFTC to report to Congress any day of the week what is going on.
CONGRESS HAS PROMISED a much larger CFTC budget! If CME/NMX happens, the increased CFTC resources will be used to rapidly transition OTC markets to the exchanges before investment banks create another taxpayer nightmare.