Thursday, September 10, 2009

Scapegoat Speculators

From The Economist (Hat Tip: D-to-the-B):
But analysts at Barclays Capital note that long swaps accounted for just 6.4% of total futures and options contracts, not enough to drive prices up on their own. Physical traders held more of the outstanding long positions (10.3%) and held even more short positions. This one set of numbers, in other words, does little to prove that speculators are overriding market fundamentals to drive prices. New quarterly data also released by the CFTC show that money flows to exchange-traded funds (ETFs) in commodities failed to correlate strongly with last year’s price surge.

Of course, even if it had been "speculation" that caused the surge I would be defending it. Regardless, the anti-speculation legislation that has been enacted will most likely just add to the volatility of prices or will ultimately just change the financial vehicles in which speculation occurs.


Anonymous said...

Let us ponder the speculation legislation. The US is issuing debt at large levels, therefore, it is necessary to create supply for the newly issued debt. So ultimately, additional regulation on futures markets maket stable and predictable prices less likely. Driving risk adverse investors to more stable and predictable investments. On the margin, pushing more investors towards government securities.

Your opinion?

Justin M Ross said...

That is a really interesting observation, and I see no problem with the logic.

I don't know if there is any existing literature that tests that specific hypothesis, but I would wage a reasonable bet that a literature review on the relevant points of your story (volatility induced demand for substitutes, regulation of futures markets) would allow us to infer that consequence.

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