Speculation, A Four Letter Word?
I was talking to someone yesterday who was decrying the size of the derivatives market, and complaining about the effect of speculation of commodity markets. He also claimed that investment banks will trade against you once they have sold you a contract.
I have been on the recieving end of sales pitches for various oil related derivatives a number of times and have worked closely with colleagues who use them. They utilised them to hedge commodity price risks. So whilst I cannot claim to be an expert, I do understand the basics.
I personally know of a number of people who have been trading heavily in oil derivatives over the past few months. They often have stories of woe to tell, of shorting before the market rises. Its not a job for the faint of heart.
Now the US government has oil speculators in its cross hairs. They are to blame for all our troubles. They cause volatility that leads to good ordinary folk losing money. The ignorant of Washington have decided to change the rules. The CFTC is on the case.
Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products.
I wonder how one defines speculation? Crack ratio trading? If you have a physical product and utilise a crude hedge to benefit from changes in crack spread, is that speculation? Likewise, the contango market of a few months ago, saw huge volumes of crude stored in tanks and vessels. By simply selling into the future market, the owner could make a guaranteed profit. No risk trades, not really speculation is it.
The Futures Industry Association is concerned.
FIA would be concerned by any measures to bar legitimate participants from these markets or that would make it less efficient for U.S. corporations to use futures as a tool for managing price risk.
Herein lies the problem for would be regulators. When companies, whether airlines, utilities or oil producers want access to fixed or guaranteed prices, they rely to some extent on the hedge funds and other derivatives traders. Without them, the market would be less liquid, spreads would be wider and some trades might not be available. Yet these self same counterparties, can also through over exuberance or bad intentions, create volatility, which doesn’t help anyone else.
So how does one fence in the ill intentioned, yet let the market reign free. Transparency perhaps?
Secondly, I would like to take this opportunity to announce improvements in the transparency of market data that the Commission will be implementing in the near term.
At least that is on the right track. One reason why the derivatives markets get so much unwanted attention is that they are so murky. So much of the market consists of one off contracts, and nobody knows what anyone else is doing, except those who originate the contracts. This means that the playing field is not level.
Anything that shifts more of the trading towards standardised exchange traded contracts, or that shines a spotlight onto the trade giving greater transparency, would be more than welcome. Crude limits on positions, driven by ideology and ignorance, will just reduce the size of the market, without really addressing any of the fundamental issues.
