Commodity prices wrong as often as 27% of time for traders

Clear Concern

“The survey shows there is clearly a concern that others could be using these price-making mechanisms to bias the price up or down depending on their interests,” Shaun Ledgerwood, a senior antitrust consultant at the Brattle Group who formerly worked at the U.S. Federal Energy Regulatory Commission, said by phone Sept. 30. “However, from the traders’ perspective, no other mechanism provides as reliable a source of information.”

The responses represent a fraction of the thousands of commodities and energy traders in the world. The 10 largest investment banks employ almost 2,300 people across trading, structuring, sales and research publishing, according to Coalition Development Ltd., a London-based research company.

The system of price benchmarks in the oil market “isn’t broken,” Ian Taylor, president and chief executive of Vitol Group, the world’s largest independent oil trader, said in an interview at the Oil & Money conference in London Oct. 1. Some prices are hard to assess because there aren’t enough trades, he said.

Logical Reason

“We occasionally don’t like the price quotations but we don’t think it’s fair to say you can’t trust them,” Taylor said. “There’s a logical reason that they are what they are, and you can’t say they’re demonstrably wrong.”

Published benchmarks provide more transparency than would exist without them, and there are no alternatives, Ehsan Ul-Haq, a senior market consultant at Walton-on-Thames, England-based KBC Energy Economics who has almost 20 years of experience in the oil industry, said by phone Oct. 1.

Assessments in spot markets contrast with exchange-listed futures ranging from crude oil to corn, which trade almost around the clock and are publicly disclosed. More than 2,000 commodity contracts trade on bourses worldwide, according to data compiled by Bloomberg based on listings by the CME Group Inc. and IntercontinentalExchange Inc.

$5.67 Trillion

Ensuring the accuracy of benchmarks has gained urgency as the global commodities market surged. World trade in agricultural, mining products and fuels swelled to $5.67 trillion in 2011 from $1.34 trillion a decade earlier, according to the World Trade Organization in Geneva.

The International Organization of Securities Commissions, the Madrid-based group representing regulators from more than 100 countries, set tougher guidelines for publishing benchmarks in a July 17 report, including making prices based on “observable” deals where possible.

Banks, traders and benchmark publishers could be fined for failing to follow rules aimed at reducing the potential for rate-rigging, according to EU rules proposed Sept. 18. While prices would have to be based on real transaction data, those underpinning the commodity markets may be allowed special treatment because of their “sector-specific characteristics,” the plans show.

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