More talk about evil speculators from Congress

Congress has been haranguing the CFTC and their oversight of speculators in the futures markets. Congress "knows" that speculators must be responsible for the high commodity prices. It is not high demand for oil from emerging markets. It is not the high demand for ethanol and the bad weather or droughts around the world. It has to be speculators.

There is no doubt that index players have increased their presence in the markets and that commodity fund trading has increased significantly. However, beyond the fact that there is more trading volume and larger open interest there is not a lot of work concerning the impact of indexers and speculation on the futures market. Here are some ideas on how to look at this issue:

• Analyze the basis - If there is excessive speculation in the futures markets then there will be unusual behavior in the basis between cash and futures markets. Futures should be moving higher without the same impact on the cash price.
• Analyze the backwardation - Speculative long positions will drive up prices relative to the cash price which will change the market from backwardation to contango. Note that if the market goes into contango, the long speculators will have losing positions regardless of the cash price moving. This will force some of the indexers out of the market.
  
• Testing the roll periods - The commodity indexes have specific rules on the roll of futures from one contract period to another. The size of indexers will cause price pressure on the roll period that would not exist for contracts that are not included in the index. Periods outside the roll rules will see less price pressure. This is easy to determine and would show if indexers are not being matched by other market participants.

It is a good time for testing of market behavior without value-laden demagoguery.