– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, June 29 (Reuters) – What is the “right” level of speculative activity in commodity markets? Different people reach different conclusions, explaining the fierce debate over position limits and other attempts to impose stricter regulation that has broken out since the price spike in 2008.
Economists and market practitioners are divided about the impact of increased participation by investors and speculators over the last decade. Some claim it has improved price discovery and facilitated more hedging. Others blame it for raising volatility, swamping fundamentals and inflating bubbles.
How people answer that first question shapes their response to a second one about how regulators and policymakers should react. Should regulators encourage more participation to improve the market functioning, or should they be trying to restrict it or at least slow it down to safeguard price discovery?
Some economists and practitioners believe more speculation must always be a good thing. If liquidity is good, more liquidity must be better. But that may not be true if the extra speculation is uninformed and simply add “noise” and volatility rather than sharpening price discovery, as leading options expert Paul Wilmott recently argued in his blog (http://link.reuters.com/kup74m).