FocusMarkets divided over CFTC idea to limit speculative positions

09 July 2009 17:19  [Source: ICIS news]

By Alex Davis

LONDON (ICIS news)--Futures trading regulation proposed by the US Commodities Futures Trading Commission (CFTC) would not guarantee market stability due to uncontrollable market fundamentals, oil products market players said on Thursday.

The CFTC announced on Tuesday a series of hearings over July and August to determine the need for limits on the number of positions traders are able to hold in oil, gas and other energy markets.

Opinion was divided among those who would be affected by the suggested changes. Some said that although the measures could help stem market volatility, speculation only has a limited effect on market movements. Others said that the measures would make markets more unstable.

A leading commodities market strategist said that the proposed changes would have some benefits.

“It’s a good thing because we definitely need more stability with oil prices. The bad thing in markets is the volatility,” said the source.

“I believe they are also looking to make over-the-counter contracts more visible to the markets, so we can know genuinely the level of trades that get done. As a result, the markets will probably not be more liquid, but they will be more stable,” added the source.

Not everyone was convinced. Some market participants remained sceptical over the benefits of the suggested limits, even when resigned to their introduction.

“I think global position limits are reasonably likely on a cross exchange basis,” said one broker.

“However, restricting position sizes may worsen, not improve, market stability. Imagine you need just to hedge a maximum 10,000 lots position limit. What would happen if a bureaucrat limits you to 5,000 lots? Would you be able to control your exposure better than before or worse than before? I think worse,” the broker said.

Another issue is that, even with the introduction, markets are enslaved to forces greater than price speculation.

International Energy Agency Executive Director Nobu Tanaka was reported on Thursday as saying that speculation may exaggerate price movements but does not necessarily determine them.

On this point, the market strategist was in agreement.

“If you look at the recent price rises [up to $73/bbl for the 2009 peak high], for instance, I think it was market sentiment that caused the increase, not the speculators,” the strategist said.

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By: Alex Davis
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