NY Times Article Explains The Role of Speculators

The NY Times has an article that does a pretty good job of explaining the role of speculators in the futures markets, and highlights some of the benefits they bring to the market: Greater volume of trading, leading to greater liquidity, and thicker, more efficient commodity and futures markets, and even possibly less price volatility. Here are some excepts:

Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all.

Speculators, people willing to risk their capital in search of high profits, are central to healthy commodity markets, they say, and broad-brush restrictions on them could damage markets that are already under pressure from rising global demand for food and fuel.

The more money that speculators are willing to put to work in the market, the more liquid it is and the easier it is to buy and sell without causing big ripples in prices.

So speculators become the ballast in the market, making the contrary trades, taking on the risks the hedgers want to shed, reacting quickly when news jolts the markets and, most important, creating liquidity by pouring in enough money to allow everyone to make very large trades quickly without causing wild price swings.

Liquidity is, in effect, the hostess gift that speculators bring to every market party, and without the capital poured into energy markets by institutional investors, prices may well be far higher and more volatile than they are, said Philip K. Verleger Jr., an economist and energy policy consultant who testifies frequently before Congress on energy issues.

Mr. Verleger said he strongly disagrees with the view that these new speculators are pushing up the price of oil and other commodities. “In fact, they have at a minimum reduced price volatility and quite possibly contributed to a lower price level than would have been obtained had they been barred from the commodity markets,” he said.