Speculators in futures and options are a much bigger beast than they used to be, but are US regulators right to attack them? Derivative markets depend on this capital, argues Philip McBride Johnson.
Speculators in futures and options are a much bigger
beast than they used to be, but are US regulators right to
attack them? Derivative markets depend on this capital,
argues Philip McBride Johnson, and if
regulators try to classify some participants as less deserving
than others, they may just end up tying themselves in
Various governments around the world allow futures and
commodity options markets to exist, not as betting parlours,
but because they constitute a privately funded insurance pool
for people in occupations where some form of price risk arises
naturally. If this risk strikes, the markets compensate them
for their losses.
A very substantial part of that insurance pool is
contributed by speculators willing to wager that the risk,
after all, will not occur. As a result, the economic
protections offered by derivatives markets could be defeated if
speculation is curtailed too much. Yes, it is the bettors who
help others reduce their risks.
At the same time, the nature of speculators has changed in
recent years. They used to be a disorganised, scattered gaggle
of people and modest institutions that could rarely marshal the
amount of capital routinely committed to these markets by
Indeed, the vast majority of cases brought by the US
regulator for market manipulation were aimed at giant grain
companies or other large businesses. Today, however, these are
often dwarfed by collective investment vehicles which are
capable of flooding the market with speculative capital, often
in the blink of an eye, only to exit just as rapidly after
their influence has been felt.
It would be incorrect to assume that these 'commodity
pools’, hedge funds and the like are driven by
nefarious motives. Most have no intention to control market
prices. And yet, there they are – the 800lb gorilla on
the sofa, a reality that cannot be ignored.
And so they are not ignored. Indeed, they are regularly
vilified as pollution in our economic brook. Here are some
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