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The Role of Traders In The Market

Victor and I wrote a white paper a while back that was published at Barry Ritholtz The Big Picture and the Ludwig Von Mises Institute.

Last week, The Economist ran two articles Know Your Onions: Commodity Speculators Do More Good Than Harm and Dr. Evil or drivel: the charge-sheet against commodity traders is flimsy that discussed the role commodity traders have on prices and their overall trading ethos.

Whenever there are high prices, the MSM likes to formulate headlines to sell more papers, or drive more traffic to their sites.

Both of these articles discuss themes that Victor and I wrote about over a year ago, among them:

“There is almost no evidence to connect speculators to the commodity-price spikes that they are routinely blamed for creating. And what little distortion speculators may cause is soundly trumped by the service they provide. In particular, they supply liquidity and price information that makes futures markets more efficient. Speculators plug the gap when the hedging requirements of raw-material producers and buyers do not coincide, offering a counter-party for trades that might otherwise have no takers.”

“…there is little empirical evidence that investors cause more than fleeting distortions to commodity prices. The most persuasive explanation for the rises and falls of commodities is demand and supply.”

I encourage you to read the articles and most importantly the comments. The thing that I get from all of this is that as far as financial literacy is concerned, even readers of the esteemed Economist are retarded in their thinking.

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  • Ngranja

    The real speculators are those people who bought 1 million dollar houses when they were making 50 000 a year.
    I think this speculation thing is about eveybody avoiding responsabilities and blaming everybody else.

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  • Anonymous

    I know the meats are dominated by hedgers, but having a high percentage
    of the open interest, to me, is a death sentence.

  • Adam

    In response to the Economist article a handful of people seem to understand the real culprit: continuous expansion of artificially cheap credit and its effect on prices and human behavior. Incentives matter! We can’t legislate greed and fear. These will always be part of human nature. Speculators are the consciousness of the market place and the economy. They are messengers of truth. Why kill the messengers?

  • Anonymous

    Thank you for commenting. This is a very well-written comment. I agree
    that you cannot legislate emotions nor morality.