Samuel Cashiola

Institutional Speculators Disrupt Futures Markets: The Evidence Mounts

I will address the questions in order

Whether or not the pension funds, endowments and mutual fund should be speculating in the futures markets (given, you say, their tremendous risks) is entirely their decision, not ours or anyone (like the government) else’s. Just like any other investment opportunity, the investment managers weigh the risk-return characteristics of the investment. If they still see an opportunity then it is their choice to take it. (Just like I’m not going to tell Bill Miller that he’s wrong for being long financials, I’m not going to tell a pension fund manager that his commodity play too risky.)

Your second question is tougher but I’ll begin by stating that I do not believe that market regulation is a good thing. In order for a market to operate entirely efficiently, it must be free. (supply and demand should be able to freely influence price) Farmers and other hedgers trade in futures, forwards (and other derivatives) markets in order to hedge price risk (among others). Why do you assume that the farmers are the only people that have the right to dictate the intrinsic value of the underlying commodity? If someone is willing to pay more for something than someone else then you would be irrational not to sell it to the higher bidder (you’d be throwing away money). Should the regulators be concerned about this? They should not if they want their markets to reflect fair market value.