When a poker player has a weak hand, he needs to play a blinder to win. And that’s what CME Group has tried to do with its position paper on Excess Speculation and Position Limits in Energy Derivatives.

The exchange has wheeled out all the arguments it can and cranked up the eloquence to fight its case: that in energy markets, the more speculation there is, the better for all concerned.

But CME knows it is late in the game. An awful lot of words have been expended trying to persuade Gary Gensler, CFTC chairman, of that view, and he doesn’t look convinced.

So it is time for Plan B. Position limits are coming for energy derivatives, so let’s make them as painless as possible. And while we’re at it, let’s make sure those shady “dark pools” in the OTC market and half-regulated exempt commercial markets feel the pain too.

Hang on, are we going to actually recommend position limits?

Well, yes, we have to or we can’t recommend that they’re set the way we want – that is, by us and very gently. (Oh, and the good guys like swap dealers and index funds will get hedge exemptions.)

But if we recommend position limits, doesn’t that mean we’re saying this stinker is a good idea?

I’ve thought of that. We’ll recommend it, not with an argument that it will actually change anything, but “to increase confidence in the futures markets”.

Well, that’s a good thing, of course.

Naturally. Our scheme of position limits will reassure everyone that speculation is being thoroughly controlled, but it won’t have the detrimental effect of driving valuable index funds and other vital liquidity providers out of the market. Anyway, they’d have nowhere to go because we’ll get the CFTC to put position limits on all those shady markets too…

Of course this fantasised conversation is entirely unfair and wide of the mark – but isn’t it a bit odd to recommend a policy you have previously downplayed the need for, and to recommend it without saying it will do any good?

CME is not the only player still in the game. Across the table is ICE, for whom Gary Gensler is not necessarily the worst threat. What if CME got its way and all the exchanges were allowed to set position limits, proportionate to the size of their markets?

Any firm wanting to hold a big position in the most liquid oil contract would have to do it at Nymex, because it would have the higher position limits. The limits could bind the exchanges forever to their present day market shares. You can see why it took only a day for ICE to come out calling CME’s proposal anti-competitive.

But there’s one thing neither exchange mentions.

Old chestnut

How often have you heard a defender of the futures market say of the political camp that wants to clamp down on excessive speculation “I think they’re confusing speculation with market manipulation”?

This has to be one of their favourite arguments. “People who think speculators are driving up oil prices have got it all muddled,” they imply. “Speculation is good because it makes markets more liquid; what’s bad is evil people who try to rig the market. Those naïve Congresspeople are confusing the two – and of course no market manipulation is going on because there are laws to prevent it and anyway the markets are too big.”

This is a cunning slur. It’s not the legislators who are confusing speculation with market manipulation, it’s the industry laissez-faire camp – and they’re doing it on purpose.

Those who blamed speculators for pushing up the oil price never said anything about the speculators colluding, or trying on an individual basis to corner the market and drive the price up.

By pretending that they did say that, their opponents are trying to delude their hearers and turn the conversation away from the real argument.

This is that it is the combined power of all the speculators put together that can unbalance the market, creating a situation where strong directional swings are more likely, and actually desirable for a good many market participants. There doesn’t have to be any manipulation or collusion for herd behaviour to move a market. And you don’t have to be a genius to make money in a market ruled by herd behaviour. On the contrary, some of the speculators proudly claim that they are passive. But these profitable swings don’t help you much if you are somebody who actually produces or consumes the commodity, and just want to get on with your ordinary life.

This is where position limits come in. Both CME and ICE advocate limits for individual firms. But it is obvious that these can do little or nothing to control excessive speculation.

They are designed to prevent an individual firm cornering the market. But if 10 speculators all operated at their position limits, and bet – without collusion – in a similar direction, it would have the same effect on prices as if one firm had made a bet 10 times as big as its position limit allowed.

The essential point is that excess speculation is a different problem from market manipulation. Whether position limits are the way to deal with it is a difficult question, but if they are, it is certain that only limits that cap the total, combined positions of all players deemed speculators could be effective.

This would be tricky to administer, but not impossible. There could be a side market in speculative trading permits, of which only a certain number would be created for each commodity in each delivery month. To engage in a trade, a speculative player would need to surrender not just money or collateral but a trading permit. The level of the industry-wide cap would not have to be a fixed percentage, but could be raised or lowered by regulators experimentally, depending on market conditions in particular commodities. Another potential virtue of this scheme is that regulators would not be banning any speculator from trading – just making it more expensive when that seemed to be in the public interest. Your call, Gary.