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.
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?
“We don’t have the regulatory tools needed to spot that sort of situation.”
The CFTC has allowed energy futures and derivatives to be traded on the electronic exchanges where there is no regulation, no position limits on contracts, no Large Trader Reports from its participants, and no routine auditing of larger transactions.
If that wasn’t enough, they then allowed the largest electronic energy exchange, the Intercontinental Exchange (ICE), to use its terminals to trade U.S. crude oil futures and next allowed ICE trading of U.S. gasoline and heating oil contracts.
Sounds like to much money chasing to little minerals and eatables.
What we need is commodity Nazis to police the markets. sac/off
Left alone, the sector would correct by gearing up and producing more. Would take a couple of years of high prices but the results curtail the demand and prices.
Interfere, more people go hungry in the long run and no incentives for alternative solutions ex. energy along with generating realistic growth constraints.
From the testimony the other day, Greenburger pointed out that the only reason the CFTC did anything about Amaranth was because FERC would “encroach” on CFTC regulatory territory. B/C FERC’s primary function is to regulate electricity, and therefore nat gas is really only of penultimate importance. So I think that is why Greenburger suggested tapping the FTC this time around…FERC has no jurisdiction over any other commodities, so they’re irrelevant…the FTC is the only regulatory body that has jurisdiction (manpower?) that reaches this far. I’m guessing, this is in the hopes that the CFTC will yet again realize that they’re losing relevance/credibility and they should do something about it.
If a “flood of money” is the problem, why are we talking about “speculators” and not central banks with their negative real interest rates?
Oh, right, I forgot that band-aids over symptoms is tradition in politics. Addressing causes is such a hassle!
To me, Lukken’s comments are less ones of substance than of stance. Like in the old western serials where the gap-smile, sagging belly, crony sheriff announces loudly to the townsfolk, “Guess I’ll have to go out and ride along the outer fences; there might be some _thieves_ out there.” Of course, the sheriff had no intention of finding any thieves, and was shouting his mouth off to insure that none found him. This is an effort to talk spec money out of commodities before nonfeasant and inert non-regulators get replaced by someone who might shoot first and ask questions later. —But any stance heading toward ‘Don’t do it’ is welcome at this point, sez I.
Dorgan opposes Lukken’s CFTC chairman nomination