The CFTC made two controversial rulings yesterday. One was to impose position limits on traders. The second was to change the capital needed to join a clearinghouse.
Both rulings were incorrect and wrong headed.
First, position limits impose a hard restriction on the amount of contracts one entity can own in any commodity. The logic behind this is false. Fans of position limits assert that if someone holds too many contracts they can influence the price of the contract, or corner the market. They reason that speculators are what drove oil prices significantly higher and made the gasoline pump price more expensive.
The position limit advocates also assert that as commodities have been sold as an asset class, firms that have no physical interest in commodity markets are driving the price, not supply and demand.
Virtually all academic studies I have seen have shown their assertions to be false.
If we are going to have transparent and competitive markets, we don’t need position limits. We ought to be encouraging, not discouraging speculation. More speculation, and more participants interacting in the market place allow for better and more transparent price discovery.
The logic behind the CFTC’s enactment of postion limits essentially says that they think commodity prices haven’t been reflecting the underlying markets. It’s their judgement of “fair”.
You tell me, what’s the “fair” price of a barrel of oil? If it shouldn’t be trading at the price Brent Crude is trading at $ICE, or WTI Crude ($CL_F) at the $CME, then what is it? If you know, you should be able to enter a trade in the market and make a lot of money.
Speculators don’t set prices. They put trades on to profit from where they think prices are going. Other market participants use the market to hedge their risk. Enacting position limits hurts speculators, but it also hurts hedgers because it makes it more expensive to hedge their business risk. Higher costs lead to less production, and less output. These position limits are just another way the Obama administration through regulation is killing our domestic economy. Death by a thousand cuts.
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