Speculators Aren't Wicked, They Keep Market Liquid

The Commodities Futures Trading Commission (CFTC) wrapped up its hearings on whether to install position limits on futures trading this week, and like other hot topics being tossed around Capitol Hill, misinformation seems to be running rampant.

One myth is that speculators only bet on prices going higher. The chart below shows both long and short futures positions for all commodities. While it's definitely not a one-to-one ratio, the chart shows that investing in futures is a two-way street, with investors lining up on both sides.

Another myth is the overall size of the speculative market. According to a recent TIME article, less than three percent of the world's oil consumption over the next year is under futures contract.

Several U.S. lawmakers have claimed that speculative investors in London are using lax laws to control oil prices. However, data published by the CFTC and the Financial Times disproves that theory.

The sale of “borrowed” stocks without registering this borrowing nor even informing the “lender” is in my mind an impropriety and should be outlawed or heavily taxed to discourage it. I’m quite sure Obummer has this practice in his target to discourage with heavy fines in the future.

Similarly, the investment in commodities in which one has no intention of taking delivery of nor even the capability of using such commodity should be outlawed. “Making” these markets is a sham whose only objective it to cause prices to rise.

Similarly, the investment in commodities in which one has no intention of taking delivery of nor even the capability of using such commodity should be outlawed.

I have generally noticed over the years that folks who complain about other folks making money in the market are usually too inept to do it themselves......otherwise they would.

Buying and selling commodities in which you have no tangible interest in ever owning helps to cause market liquidity (more players = more liquidity). A liquid asset has some or more of the following features. It can be sold rapidly, with minimal loss of value, any time within market hours. The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. Another elegant definition of liquidity is the probability that the next trade is executed at a price equal to the last one. A market may be considered deeply liquid if there are ready and willing buyers and sellers in large quantities.

It is amazing that the very people who would be most upset at price spikes in the commodities markets are the very people who would legislate away the very vehicle that keeps price spikes and collapses at a minimum.

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