Meet The Nation: Buying and selling our nation’s future

In 2008 there was something of an oil crisis and prices shot over the $4 mark. A government agency called the Commodity Futures Trading Commission (CFTC) did an investigation into what caused the price increase. What they found was that the massive jump in price was caused by just one trading firm, Optiver Holding.

In January they had bought up to over 61 percent of all West Texas Intermediate, a type of crude oil seen as a benchmark for oil pricing, that was due on a futures contract in February of that year. They also bought 84 percent of oil due on the April contract in March. This created the illusion of a high demand in the market for oil, and oil prices skyrocketed.

To truly understand what these people were doing, you first have to understand the basics of the futures market, which is famous for its complexity.

Essentially, a future is a bet between two parties regarding the price of a commodity, such as gold or oil. A future is an agreement made to sell a certain amount of commodities at a certain price at a certain date in the future. The person selling the future is betting that the commodity will either drop or stay the same in price, making them more money off the deal than they otherwise could have, while the buyer is betting that the commodity will increase in price, getting them more of the commodity than that money otherwise could have.

Optiver Holding bought up a large number of oil futures, then bought up a large amount of oil, meaning that suddenly, because of the simulated increased demand for oil (which increased the price), their futures were worth much more.

The CFTC released this information to the public, which meant that other companies now knew how to artificially inflate the futures markets.

In 2010 the Wall Street Reform and Consumer Protection Act was passed and one of its provisions severely limited futures trading by financial institutions. Specifically, under that law financial institutions could only own 5 percent of oil available.

This made sense as a way to curb artificial price inflation, as before financial institutions could buy and trade oil futures in 1990, gas prices were well under $2 a gallon even adjusting for inflation.

However, the final bill that passed allowed the CFTC to have final say over the futures restrictions. The CFTC decided to change the law. The new CFTC proposal states that no financial institution or individual can own more than 25 percent of deliverable supply in the month nearest to delivery.

While this act is being hailed as a massive step forward in regulation, the 25 percent limit does very little in reality to stop price manipulation.

All it would take would be four companies working together to manipulate the price of gasoline so high it goes above $5 a gallon.

According to ABC news in an article written on Jan. 6 by Susanna Kim, experts are predicting that the average gas price for the year of 2012 will be $3.86 to $4.13 per gallon which would be the highest yearly average for gas prices in history.

While the Wall Street Reform and Consumer Protection Act has done much more to regulate the markets, there are still major issues apparent that need to be fixed. However, no one seems particularly eager to actually fix them.

Many Republicans are arguing for deregulation, while Democrats seem perfectly happy with what is little more than token regulation.

By not ensuring regulations prevent manipulations of the market that have had major consequences in the past, we are practically ensuring that we will face those same consequences in the future.

5 comments on “Meet The Nation: Buying and selling our nation’s future
  1. Wow, your post is not only conceptually wrong, but also completely wrong on the facts of the case. Perhaps you should actually read the CFTC complaint and try to understand what was happening before you spout off on the matter pretending to understand the markets and the case in particular.

    • http://www.cftc.gov/PressRoom/PressReleases/pr5521-08

      “According to the complaint, the defendants employed a manipulative scheme commonly known as “banging” or “marking”’ the close. “Banging the close” refers to the practice of acquiring a substantial position leading up to the closing period, followed by offsetting the position before the end of the close of trading for the purpose of attempting to manipulate prices.”

      “The manipulative scheme, in defendant Dowson’s words, to “bully the market,” involved trading a significant volume of futures contracts in Crude Oil, Heating Oil, and New York Harbor Gasoline in the opposite direction of the associated TAS position, before and during the close of the contracts. The defendants’ goal in trading the large volume of futures was to improperly influence and affect the price of futures contracts in Crude Oil, Heating Oil, and New York Harbor Gasoline.”

      • Correct and that is significantly different that what you wrote in the piece. You wrote that they bought up 61% of the WTI and 84% of oil due in April to create an illusion of high demand. This is wrong.

        You also say they bought up the future and the oil itself to influence the price of the future. This is also wrong. They never purchased the physical oil.

        Lastly, you imply that they drove up oil prices. This is also wrong. On most days that are accused of price manipulation, they are accused of driving the price down.

        Trying to link this case to an increase in gas prices is silly. I would suggest instead concentrating on the inverse relationship between the value of the dollar and the price of commodities (particularly oil). You will find that as the dollar drops against other major currencies commodities rise across the board. This is simply due to the fact that commodities are valued in dollars. Thus it now take more dollars (because the value has dropped) to buy the same amount of a commodity.

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