David Lukken, the acting chief of the CFTC, said today that while his agency is set up to detect market manipulation, it is less well equipped to gauge the impact of a flood of new speculative money into the commodities markets. However, he said the agency intends to get to the bottom of the question. From the Associated Press:
The government’s chief commodities trading regulator says his agency is determined, but ill-equipped, to gauge the effect an influx of speculative dollars has had on energy and food prices.“Our system was mainly designed to detect deliberate manipulation in the commodity markets,” said Walter Lukken, acting chairman of the Commodities Futures Trading Commission. “But what’s being talked about now is the question of whether the massive amount of money coming into the markets is overwhelming the system.”….
He laid out recent initiatives aimed at gathering more information on the role hedge funds and other large institutional investors play in moving energy and agriculture markets.
This appears to be an acknowledgment that the Michael Masters thesis, that what he called index speculators (long only commodity index buyers) are pushing prices upwards may have some merit. Note that Masters did not cite the other source that has also been cited as a possible culprit: hedge fund shifting to commodities to bolster flagging returns, particularly since they can obtain leverage without going to their no-longer-very-friendly prime broker. Mind you, the CFTC is NOT saying that Masters is right, but the very fact they intend to look into his argument says the agency thinks it can’t dismiss it out of hand.
Bloomberg provided additional detail:
“A lot of money is flowing into these markets, potentially creating a bubble,” Lukken said. “We don’t have the regulatory tools needed to spot that sort of situation.”[Commissioner Bart] Chilton and Lukken both said that the international nature of trading, the increase in the number of traders and amount of money being traded creates new challenges for the commission.
Anonymous 
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Yves,
Wouldn’t a flow of speculative funds into a market, that was both large enough and conducted in a coordinated fashion amongst various players, fall within the definition of market manipulation? Isn’t there a post-mortem way of reviewing data where this kind of conduct could be identifed(in the same way those college professors analyzed data after the fact and created a blueprint for identifying those who particpated in the stock options backdating scandal)? If so, what type of smoking-gun data should the CFTC look for?