Excessive speculation, the political definition

April 23, 2011 11:35 AM

Dan Roth, president and CEO of the National Futures Association, talked about regulation and the NFA’s approach to it at the second annual New York CTA Expo. Roth stressed the self in self regulation and said that lack of affective self-regulation leads to bad policy and bad legislation.

This brought up the subject of excessive speculation, which Roth defined as, “changes in the price of commodities that cause pain to voters.”

He acknowledged that this was the political definition and noted the need to educate politicians and regulators, as there is presently excessive specualtion under that political definition. We prompted Roth by pointing out a letter sent to the Commodity Futures Trading Commission (CFTC) by 12 senators last month asking it to raise margins for crude oil speculators.

The letter is disturbing as it makes dubious assumptions to cause and affect regarding the price of commodities. A wave of such recommendations first came about in 2008 when crude oil spiked near $150. While such draconian measures were not adopted, speculators are once again becoming a convenient scapegoat for rising prices.

More recently the Attorney General has weighed in announcing “the formation of a Financial Fraud Enforcement Task Force Working Group to focus specifically on fraud in the energy markets.”

This generally comes under the category of appearing to do something, perhaps to mollify those 12 Senators but is a little scary as it could lead to bad policy and bad legislation.

CFTC commissioner Bart Chilton has promoted the “need to do something” approach and has challenged the notion that there has been no empirical evidence that speculators are responsible for rising prices.

The Senators take a step further by simply assuming speculation is the cause and throw in words like “proven” pretty loosely. Their letter states, “Government data confirm that oil speculators are driving the price increase.”

 I am not sure what data that is but there is certainly no consesnsus within the industry on that. It will be hard to set good policy when no one agrees on the facts.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.