The recent decision by the US District Court for the District of Columbia to remand back to the Commodity Futures Trading Commission its new rules on speculative position limits, adopted under the Dodd-Frank Act, for further review has triggered a fresh debate over whether speculators should be restricted in the size of derivatives positions that they may hold at any given time. This is good.
A starting point might be to ask why those who risk their money on events over which they have no control and in which they may have no personal interest are called "speculators" in the first place. I receive that pejorative name if I trade soybean or silver derivatives, but not if I buy shares in a soybean processor or a silver mine even though I am taking the same gratuitous risk under the same conditions. In the latter case, I am a beloved "investor" whose place in Heaven is firmly assured.
Do we hear demands from the Congress or from the general public to limit the size of my shareholdings in a company? Of course not. If owning a little stock in, say, Exxon Mobil is a small service to the nation's good, I can achieve superstar status by buying a boatload of it. Sure, I may have to disclose the size of my holdings (the Securities and Exchange Commission loves "disclosure") but no one is going to demand that I sell some of the stuff. Why, that would be unAmerican!
We can thank in part the fact that the securities community has better wordsmiths than the derivatives crowd. But, in defense of the latter, it is tough to be treated like a beauty queen when elected officials refer to derivatives traders as "grain gamblers."
But purchasers of shares lubricate the economy by contributing capital to business enterprises that make us an economic powerhouse. Who can fault that! But speculators add value as well by helping those companies to manage their day-to-day business risks. They both play for the same team.
Does a large speculator affect commodity prices any more than a large investor can affect share prices? A big share purchase or sale often sends a jolt through that company's stock value. And yet, no one tells Warren Buffett or a private equity firm when and how these decisions must be made. Still, speculators are required to wear electronic dog collars and are zapped if they cross a particular limit on their holdings.
One argument for this "distinction" is that commodity speculators can directly impact the prices of goods and services that we all need. Does this mean that stocks are not important in our lives? Don't say that to a retiree!
In the end, of course, perceptions dominate the outcomes of most debates, not to mention national elections. We must play the hand we are dealt and, for speculators, it is not a pretty one. So, I suggest that we live with speculative position limits. What to limit and at what level is the challenge. Perhaps the Martian Rover will find the correct numbers.