Exchanges Say Don't Blame Speculators, The Evidence Doesn't Support It

(Reuters) - Government meddling in financial markets risks price distortion and under-investment, and political attempts to tackle "speculators" are misguided, commodity exchanges told Reuters Global Energy Summit.
Executives of the world's trading floors for oil and other raw materials say there is no evidence that speculators cause volatility such as the huge swings in oil in 2008 up to a record of almost $150 per barrel and down to a low of nearly $30.
"Effective regulation is great but any time a politician gets involved, frankly they will screw it up," Thomas Leaver, Chief Executive of the Dubai Mercantile Exchange, said.
"Any time anyone interferes with free and unfettered markets either through regulation, subsidies or through tariffs barriers ... it generates poverty, it generates dislocation," he said.
Leaver said attempts in the United States and elsewhere to limit trading in markets and curb influence of speculators were misguided because outside investors such as hedge funds and others had been blamed wrongly for recent volatility.
"There is no empirical evidence anywhere -- whether it be from us or the CME or ICE -- that (oil's) move up to $148 or the decline to $30 had anything to do with speculation," he said.
"GOVERNMENTS DON'T UNDERSTAND"
Julie Winkler, head of research and product development for CME Group (CME.O), which runs the New York Mercantile Exchange where benchmark U.S. light crude oil trades, agreed.
"There actually haven't been any studies that have proven that speculators were the cause of the price run-up," she said.
David Peniket, president and chief operating officer of ICE Futures Europe, part of IntercontinentalExchange Inc (ICE.N), which trades North Sea Brent crude oil, said there was no evidence that imposing position limits on traders would curb volatility or reduce price levels in oil markets.
"If they (position limits) are being used as a tool to reduce volatility or price levels, then we fear those who are using them will be disappointed," Peniket said.
"There have been a number of studies which demonstrate that speculation has not been a key factor in increasing oil prices."
Leaver said most investors these days did not trade outright, or "naked" positions, betting on a big move one way or the other, but instead tended to trade in spreads, which can be much less risky because markets are so volatile.
"Nobody takes naked longs or shorts any more -- or if they do I haven't met them. It is a much more risk managed business." Leaver said he was concerned that proposed new regulations could interfere with the participation in the DME, which trades futures in Oman crude.
"I think everybody is who is in markets at all whether it is participants, exchanges, everybody in concerned, and governments should be too because what I am afraid is happening is that governments don't understand what is going on," he said.
"They are throwing more regulation at markets rather than making more effective the regulation that have already got," he said. "I just don't think governments have got a clue. Speculators are the great scapegoat. They are easy to identify: the guy with the black hat in the corner."
Leaver said the result could be "distorted markets."
"Distorted markets send the wrong price signals and people make the wrong investments or inadequate investments in areas where there are food shortages or energy demand needs."