Government Turns Both Barrels on Honest Business

If you were not outraged by the malpractice at the CFTC over the past few years before, you ought to be now. It’s so bad that socialist Senator Bernie Sanders from Vermont is trying to carry their water for them.

The debate over commodity disclosure is heating up. If the CFTC wins, it will fundamentally change the price you pay for goods and services. By the way, the price you pay will be higher. ($ICE,$CME,#CFTC)

Here is another case where government regulators are putting a round peg in a square hole. One size fits all regulation doesn’t work.

Some background. In the cash equity world (stocks), when a company or fund holds a certain percentage of stock they have to disclose it. Why is this a good rule? Because the holders of the stock vote in corporate elections. They can change the management team if they own enough stock which could be adverse to the operation of the business. Stocks are a holding of the public’s net worth. We need to have good disclosure rules and it’s why I have been against the way the cash equity market is currently structured and regulated. ($CBOE,$NYX,$NADQ,$BATS,#SEC)

Commodities are far different.

Releasing the holdings of all firms will force those firms to trade in underground markets where no one knows the price, or the exact holdings of the players. The over the counter market is not transparent, and when a market dislocation happens, no one will see it coming. The tail will wag the dog. Here is what the Futures Industry Association had to say,

“Many people who buy and sell securities tied to oil, however, say that releasing the data could be harmful to their trading strategies and could prompt some to reduce their activity, having a potentially chilling effect on the market.

The Futures Industry Association has said that the release of the 2008 data “poses a serious threat” to the confidence of those in the market, who believed they were reporting their positions to regulators privately. The association said it will ask the CFTC to investigate whether any of its rules governing the handling of confidential data have been violated.”

Currently there are foolproof systems in place to stop market manipulation. The CFTC enforces position limits, and the exchanges set margins on the contract. Both organizations, regulator and exchange, know who is holding what and how many at all times when the market trades. As long as the participant has enough money to hold the position, they can play.

The market participant determines the amount of contracts they want to hold based on an internal risk/reward ratio that they calculate given the limits and margin requirements placed on the entity by the CFTC and exchanges. Disclosure will disrupt the risk/reward ratio and be adverse to a well functioning market. Transparency in the manner the CFTC seeks will make the markets even more manipulated because if I can see what my competitor has, and know his balance sheet position I can gang up with partners and move markets against them to force them to move.

Believe me, when we traded in the pit we kept our positions a closely guarded secret. That way when we needed to move a position, we could start to do it quietly before our competitors did. Or, in smaller markets like pork bellies, if you knew everyone’s position you could manipulate the market for a very short period of time to force favorable market action for yourself. Once a market was manipulated enough, it would die as less people would trade it. Kill the markets, kill transparency. The costs to the general public skyrocket.

It’s just sloppy thinking and unrealistic to think that any speculation has a long term effect on the price of any commodity. Is the price of gold over $1800/oz because of speculation? Or is it lack of confidence in world central bankers? Did the price of cotton soar in 2010 because of speculation? Or was it poor weather conditions worldwide?

The market has priced oil correctly through all the ups and downs over time. When oil was rallying to $140/bbl, there was a good economic case to be made for it. When oil dropped in 2008 from $144 to $35 per barrel, there was a good economic case to be made for it.

Speculation only makes price discovery more transparent-and thus the price you pay less than you normally would pay. Because speculators exist, the bid/ask spread is tighter than it normally would be. That’s called economic competition. The more competitive a marketplace, the more volume that goes through it. This makes it easier to put on hedges and take them off. That is added value for companies that need to manage their risk in the market.

If they can’t manage their risk efficiently, they pass the higher costs to you.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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