28 • OIL
&
ENERGY
and that index funds have caused “unwar-
ranted price changes” and constitute an
“unwarranted burden on commerce.” The
PSI report urged legislative and regulatory
measures to limit the impact of index fund
investments in commodities.
These recommendations include the
phasing-out of CFTC no-action letters that
essentially classified index funds as
bona fide
hedgers and exempted them from specula-
tive position limits. The report also urges
the CFTC to collect more data and evaluate
the extent to which index funds affect prices
for non-agricultural commodities including
crude oil. While the CFTC has made con-
siderable effort to improve data collection,
regulators have not yet published any sort
of comprehensive evaluation on the role
index funds as recommended by the bipar-
tisan PSI report.
The committee should
inquire with the CFTC on its progress
in implementing the recommendations
of the bipartisan PSI staff report and
addressing end-user concerns over index
fund speculation.
Of note, our coalition has supported
legislation in Congress that would limit
the ability of index funds to speculate in
commodities. In the House of Representa-
tives, then Congressman Ed Markey of
Massachusetts introduced the Halt Index
Trading of Energy Commodities (HITEC)
Act (H.R.785) on March 13, 2013. It cur-
rently enjoys 21 cosponsors. The bill would
prohibit new investments in commodities
by index funds and give existing index funds
two years to wind down their positions.
The Congress has to look no further
than the way Wall Street markets participa-
tion in index funds for the reason why and
how index funds adversely affect the orderly
operation of these markets and artificially
inflate commodity prices, as follows;
“How
do I sell something that I don’t own, or why
would I buy something I don’t need.”
The
answer is simple. When trading futures, you
never actually buy or sell anything tangible;
you are just contracting to do so at a future
date. You are merely taking a buying or
selling position as a speculator, expecting to
profit from rising or falling prices. You have
no intention of making or taking delivery
of the commodity you are trading, your
only goal is to buy low and sell high, or
vice-versa. Before the contract expires you
will need to relieve your contractual obliga-
tion to take or make delivery by
offsetting
(also known as unwind, or liquidate) your
initial position. Therefore, if you originally
entered a short position, to exit you would
buy, and if you had originally entered a long
position, to exit you would sell.”
The com-
mittee should consider proposals to limit
the role of index funds in commodities
for possible inclusion in the forthcoming
CFTC Reauthorization Act.
HIGH FREQUENCY TRADING
In order for commodity prices to accu-
rately reflect real-world supply and demand,
futures, options and swaps markets must
be driven by educated traders that are
responding objectively to market funda-
mentals. Our coalition grows increasingly
concerned over the impact of high-speed
automated trading by means of computer
algorithms – also known as algo-trading
or High-frequency Trading (HFT) – on
the commodities markets. HFT has already
become a dominant force in the securi-
ties markets and many allege it has been
responsible for a series of disruptive market
events, including the flash-crash that caused
the Dow Jones Industrial Average to plunge
1,000 points (9 percent) on May 6, 2010.
In response to the 2010 “flash crash,”
on November 2, 2011, Sen. Tom Harkin
(D-IA) and Rep. Peter DeFazio (D-OR)
introduced the Wall Street Trading and
Speculators Tax Act, which would impose
a .03 percent excise tax on all trades of
securities. Sen. Harkin and Rep. DeFazio
said an analysis by the Joint Committee on
Taxation estimated the tax would generate
$352 billion in revenue from January 2013
through 2021, if enacted. The tax was
designed to disproportionately affect HFTs,
who place thousands of trades in a matter
of minutes. While this effort failed in 2011,
on February 28, 2013, Sen. Harkin and Rep.
DeFazio reintroduced a financial transac-
tion tax bill, which was then referred again
to the House Ways and Means and Senate
Finance committees. CMOC looks forward
to working with the Congress as it considers
these important measures.
More recently, some have accused algo-
trading as responsible for a 145-point market
drop in response to a false tweet about a
terrorist attack on the White House that was
posted on a hacked Associated Press Twitter
feed on April 23, 2013. A May 1, 2013
Wall
Street Journal
exposé further charges that
“High-speed traders are using a hidden
facet of the Chicago Mercantile Exchange’s
computer system to trade on the direction
of the futures market before other investors
get the same information.” According to the
Journal,
such trades are conducted by com-
puters that have an advantage of just “one to
10 milliseconds” and allow the structure of
orders “so that the confirmations tip which
direction prices for crude oil, corn or other
commodities are moving.”
Government Affairs
