New Commodities Regulations Could Stop “Insider Trading” Practices of Big Investors

Goldman-Sachs: an energy company in disguise? (image: cnn.com)

Politicians are continuing to eye commodities markets, seeking a way to regulate a marketplace that has a profound effect on the world economy.

Commodities trading is regulated by the Commodities Future Trading Commission. Many legislators have been discussing ways to tighten commodities regulations and the Obama administration is very supportive of these efforts.

The CFTC oversees commodities markets such as NYMEX and the Chicago Board of Trade. However, many commodities traders use unregulated “over-the-counter” (OTC) trading methods. The Huffington Post reported on Wednesday on the lack of transparency in the process and  the risk they present to the financial system: “On the road to reform we shouldn’t be leaving any loopholes,” Warren Gunnels, a senior policy advisor to Sen. Bernie Sanders (I-Vt.), told the Huffington Post. “It’s important that we not just look at OTC derivatives, but also see how this whole commodities market can be more transparent.”

Many have said speculators, specifically large investment banks and other financial institutions, have caused a spike in the price of oil. These companies have the ability to manipulate prices by using insider knowledge to their advantage. As written on the Huffington Post:
[Large bank holding companies] earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.
“There is much in the energy market that would be considered insider trading on Wall Street, but is completely acceptable in the commodities market,” said Tyson Slocum, the director of the energy program at Public Citizen. Goldman Sachs, Slocum says, should be considered “an energy company” and has been increasingly buying up pipeline and storage facilities. “Then say they are only using the acquisitions to hedge positions on their infrastructure. What they are really doing is getting an insider peek into information that gives them a significant edge,” Slocum said.

In addition, others are investigating ways to mitigate the influence of speculators on commodities markets, as detailed on The HEAT Zone earlier this month:

Some legislators would also like to place limits on the amount traders can buy or sell on the commodities market. Another issue Congress could tackle relates to capital requirements; some have argued that traders can borrow money to purchase commodities without having to put up too much capital as a risk management tool. This could put the entire commodities market at risk if too many overleveraged traders are unable to pay up when contracts come due.

All of this could have a major effect on heating oil prices, as heating oil is traded as a commodity on NYMEX, but no one knows what that effect will be. Stricter regulation could make the market more transparent, which could lead to price stabilization. But increased regulation could also increase prices for traders, who in turn could pass the costs on to consumers.