Commodity trading controls can yield unsavory surprises

Bob Tippee
OGJ Editor

New attempts to moderate energy-price movement with controls on commodity trading might, like much regulation of markets, yield unsavory surprises.

The US Commodity Futures Trading Commission is considering new controls on off-exchange trading of energy derivatives. And the Department of Treasury has sent Congress a plan for trading reform.

Propelling this regulatory push is the belief that excessive speculation aggravates swings in energy prices and makes markets susceptible to manipulation.

Little about the effort—other than the proposed extension to energy of regulation now focused on agricultural commodities—is new, points out Michael Lewis of Deutsche Bank AG’s London office.

Congress has tried to pass laws limiting commodities speculation for more than 100 years, Lewis writes in Deutsche Bank’s Commodities Weekly of Aug. 14. The effort accelerated in the 1920s.

“In 1921, legislation was introduced to ensure grain futures trading was confined to regulated exchanges that allowed federal scrutiny,” he writes. “In 1936, the Commodity Exchange Act was introduced to combat excessive price declines in grain and cotton prices, which were being blamed on speculators.”

Legislation in 1947 provided for the publication of the names, addresses, and market positions of large traders. Commodity prices were rising after World War II.

Lewis lists other attempts to curb speculation, calling “the most draconian” a 1958 law banning trading of an onion futures contract on the Chicago Mercantile Exchange.

Research published during the 1960s said onion prices were more stable before than after imposition of the ban, Lewis reports. The research later was challenged. But the ban didn’t keep onion prices from swinging wildly in the 1970s.

In fact, Lewis says, the onion price record suggests “the presence of a futures market might actually reduce the price volatility of a commodity.”

Of course the consequences of regulation often contradict intention. The push to regulate energy derivatives, for example, might cut activity on the New York Mercantile Exchange, Lewis warns, adding: “Perversely focusing on regulation to curb speculative activity may possibly increase the pricing power of OPEC over time at a time when the US government is attempting to do the exact opposite.”

This feature will appear next on Sept. 4.

(Online Aug. 21, 2009: author’s e-mail:

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