One of the key roles of government with respect to the economy is in gathering and monitoring information that normally would not be acquired by markets. This information may not be gathered because competitors may see little value in providing sensitive information like positions in the market even though there is value in knowing in aggregate what the market is doing for oversight. here is also a free rider problem. Industry data may be useful but no single user may want to go to the expense of gathering it.
The gathering of information on exchange trading may be useful for the overall market through oversight by the government. There are externalities associated with trading and position taking that may negatively affect the markets. Large positioning may lead to market squeezes or manipulation which will destroy the viability of the marketplace, yet there are cost with information gathering. There is the direct costs of processing the information but there is also the market cost of providing information of positions especially if it focused on a well-defined group.
To eliminate the potential for market manipulation, there have been cap set on the size of speculative positions. To enforce this rule, market position information has to be collected. This aggregation may be best done by the government across all exchanges.
The commitment of traders report from the CFTC provides information on market futures positions by large traders. It has been broken into two major categories, commercial users which would be hedgers and non-commercial users who would be speculators. This is not the case for commercial users who are able to get exemptions based on their business needs. Unfortunately, the breakdown of the market into these two simple categories are not enough to provide useful information for the market as whole as well as regulators who have to watch for speculative excess or market manipulation.
Index funds who buy commodity futures as an investment fall into the grey area of being neither commercial users in the processing or growing of some commodity or represent true speculators who try and profit from the rising and falling of prices in markets. The index trader is a hedger only to the extent that the investment that he makes in commodities is uncorrelated with the equity exposure that may represent the bulk of their risk exposure, Clearly, the index investors would not be a hedger in any sense of the word if there long commodity exposure was highly correlated with the other assets in their portfolio. Indexers are hedgers only because of the statistical artifact that the correlation is low. The idea of viewing these markets participants as commercial users stretches the intent of the rules. Broker dealers who offer commodity products to pension funds may be considered hedgers because they serve as intermediaries, but there is still the issue of there overall trading in this area. However, the market and regulators have been unwilling to make this argument to date because the added participation to the markets was viewed as a positive.
The proposals of adding a separate category for indexers makes sense. This traders are supposed to be information-less much like an index traders. The idea of being more stringent on hedge exemptions also makes sense, but it there may be the fallout that more traders will be done off-exchange which would not be beneficial.
There is still the issue of whether index traders have driven prices higher but I will leave that to another posting.
The gathering of information on exchange trading may be useful for the overall market through oversight by the government. There are externalities associated with trading and position taking that may negatively affect the markets. Large positioning may lead to market squeezes or manipulation which will destroy the viability of the marketplace, yet there are cost with information gathering. There is the direct costs of processing the information but there is also the market cost of providing information of positions especially if it focused on a well-defined group.
To eliminate the potential for market manipulation, there have been cap set on the size of speculative positions. To enforce this rule, market position information has to be collected. This aggregation may be best done by the government across all exchanges.
The commitment of traders report from the CFTC provides information on market futures positions by large traders. It has been broken into two major categories, commercial users which would be hedgers and non-commercial users who would be speculators. This is not the case for commercial users who are able to get exemptions based on their business needs. Unfortunately, the breakdown of the market into these two simple categories are not enough to provide useful information for the market as whole as well as regulators who have to watch for speculative excess or market manipulation.
Index funds who buy commodity futures as an investment fall into the grey area of being neither commercial users in the processing or growing of some commodity or represent true speculators who try and profit from the rising and falling of prices in markets. The index trader is a hedger only to the extent that the investment that he makes in commodities is uncorrelated with the equity exposure that may represent the bulk of their risk exposure, Clearly, the index investors would not be a hedger in any sense of the word if there long commodity exposure was highly correlated with the other assets in their portfolio. Indexers are hedgers only because of the statistical artifact that the correlation is low. The idea of viewing these markets participants as commercial users stretches the intent of the rules. Broker dealers who offer commodity products to pension funds may be considered hedgers because they serve as intermediaries, but there is still the issue of there overall trading in this area. However, the market and regulators have been unwilling to make this argument to date because the added participation to the markets was viewed as a positive.
The proposals of adding a separate category for indexers makes sense. This traders are supposed to be information-less much like an index traders. The idea of being more stringent on hedge exemptions also makes sense, but it there may be the fallout that more traders will be done off-exchange which would not be beneficial.
There is still the issue of whether index traders have driven prices higher but I will leave that to another posting.
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