Commodity markets are too important to be left to hedger

Senator Joe Lieberman said that he will propose a ban on speculation that would prohibit institutional investors from participating in commodity markets.

If we leave the futures markets to the hedger, then who will take the other side of the trades? The market needs a mix of buyers and sellers to function properly. Of course, only simplistic views support the idea that hedgers are always short and speculators are only long. The question is whether there is an appropriate mix of buyers and sellers when there are large number of speculative long positions associated with indexing. These long traders are like any index traders, informationless. Their actions are not based on the value of the commodity or on recent news. The action is somewhat mechanism to ensure exposure to the commodity markets as an diversifying asset. An increase in speculative long open interest may actually cause more hedger participation in the market. More farmers may hedge if they know that there is strong liquidity in the futures markets.

Rational analysis of the buyers and sellers of futures markets is necessary. Oversight to ensure that there is no market manipulation and the market is believed to be fair is essential, but legislation that will will reduce some market participation will only hurt the functioning of the markets at this time.