Regulation in Commodities Trading Markets

A big question recently has centered around the limiting of "speculators" on commodities trading. Essentially, the question is whether the Commodity Futures Trading Commission (CFTC) should put position limits on "non-commercial" (those not using futures to protect actual positions in the underlying commodity) entities speculating on various energy prices through the Futures market.

This is a Bloomberg article explaining the questions facing the CFTC Chairman and Congress this week:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayPFPSDPLyTw

I understand the argument that so-called speculation drives up prices of a commodity (oil) that we all desperately depend on and that the common man is indeed affected by the increase in price of oil, so therefore the speculation should be limited.

However, the thing I found interesting from this article in Barron's over the weekend was that it suggests Commodity Index Traders (CITs) somehow skirted the designation of "non-commercial" and the author suggests these players are where the excess volume is coming from because they are essentially "buy only funds". Although I did not find a great definition of CIT, I assume these are the buyers of contracts that make up things like the USO (ETF advertised to mimic the price movement of oil) and UNG (ETF advertised to mimic the price movement of natural gas). Thus "Buy Only" because products like the aforementioned ETF's have only been growing in size.

http://online.barrons.com/article/SB124727509296426335.html#mod=BOL_hps_mag

My conclusion is that although I see that these funds are likely responsible for some of the move up in commodity prices at certain times, I would not want to limit your's or my access to such products. There are very real reasons that we would want to have direct exposure to oil or nat gas rather than doing so by investments in individual oil and nat gas related companies. It seems like our government resources would be better used in areas where markets will not sort things out.

At the end of the day $147 a barrel of oil last summer was likely excessive, but did the market correct to something closer to fair value? The answer is yes. And don't speculation and speculative bubbles provide you with tomorrow's next big opportunity? The effort at futures market regulation comes off as simple political posturing and a waste of resources.

Thanks to another local victim of graduate school summer internship programs for sending me the original Bloomie article

-2outof4