The chairman of the Commodity Futures Trading Commission, Gary Gensler, has announced that the agency will hold a series of meetings in July and August to consider how it can use its existing statutory authority to “ensure the fair, open and efficient functioning of futures markets.” The first of the meetings will focus on “whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products.”
The New York Times presents the story as a reaction to swings in oil prices in recent months and as “part of a broader shift toward tougher government oversight under President Obama.” The cynical voice inside my head suggests that only when oil prices swing upwards do federal regulators get concerned about speculation and “market integrity.” BTW, I’m not sure what “market integrity” is, exactly, but it sounds like something good so we probably want more of it.
Admittedly, oil prices have been volatile in recent months (as discussed here yesterday), but what theory and evidence suggests that speculative limits set by the CFTC would make oil prices less volatile. I think it reasonable to believe that much of the volatility in the market simply reflects general uncertainty about the immediate and medium-term future of the economy as a whole and the oil industry in particular. If this is the case, wouldn’t dampening market signals in futures markets just “shoot the messenger” while at the same time hampering the ability of the futures market to help resolve that uncertainty?
Banning futures trading in onions – something the United States did back in the late 1950s – was intended to reduce price volatility in onion markets. Evidence is that it didn’t work. I’m not familiar with all the details of the literature on futures trading in agricultural products, so I wonder if there is any evidence that “market integrity” has been improved by the use of limits on speculative holdings.