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US Energy Regulators, Market Makers Wrangle Over Speculation January 26, 2007

Posted by notapundit in Economic News, US News.
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HOUSTON (Dow Jones)–As more private money has poured into the energy commodities markets during the past several years, regulators argue that the market needs more oversight especially of “large” traders who, by the size of their market positions, are capable of manipulating prices.

Although market makers say speculation in commodities markets increases liquidity and helps lower prices, regulators argue that excessive speculation can cause energy prices to skew wildly from the fundamentals of supply and demand, with the over-the-counter electronic markets as the main point of contention.

The Commodity Futures Trading Commission tightly regulates the New York Mercantile Exchange, which also carries trading position limits, but only loosely regulates electronic trading platforms.

The agency can’t get a clear picture of the electronic market or prevent large trading losses, said Dan Berkovitz, an adviser to Sen. Carl Levin, D-Mich., and a staffer of the Senate Permanent Subcommittee On Investigations. Berkovitz was speaking at an energy trading conference in Houston Thursday.

“The CFTC only sees part of the active market and can take no proactive stance to tell a trader ahead of time they cannot do that,” he said. “I don’t see how the whole regulatory panoply applies to one and not the other.”

Regulators see speculators in over-the-counter commodities futures markets as driving overall prices higher, while industry executives argue they temper prices, allowing them to trade within a fair range.

In defense of a loosely regulated electronic market, several conference speakers noted the difference between speculation and manipulation, saying that the reasons for price volatility in the energy markets are because of a fundamental tightness of supply.

“A lack of investment in energy infrastructure, a lack of investment in (exploration and production), and the threat of disruption from terrorism (all contribute to volatility),” said Kyle Dickard, a managing director with Merrill Lynch Commodities Inc.

Both the U.S. Senate and House of Representatives have introduced legislation calling for wider regulation of the commodities trading industry as a whole.

Ideally, trading firms should report their activity to the government, said Michael Cosgrove, president of Amerex Brokers in Houston.

Cosgrove added that the burden is on the individual firm to rein in traders who take too many positions by holding onto some of their bonus money for trades that went well. He said he is flummoxed at how some traders who lose millions and billions of dollars of clients’ money in one firm are easily hired onto another, essentially with no recourse.

If the CFTC has its way, the market will be left to fend for itself.

Walter L. Lukken, commissioner of the CFTC, said Thursday that excessive regulation and litigation drives capital to overseas markets where oversight is light-handed.

The industry can self-regulate, he said.

In addition, he said the commission’s monetary and human resources are spread thin since the nation has been at war with Iraq.

“We’re at critical levels in funding and staffing,” he said. “Employee levels are at the lowest point in (our) 30-year history.”

By Jeanine Prezioso, Dow Jones Newswires

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