In the book "Paper Lion" by George Plimpton the author famously proved that the average guy off the street cannot compete in professional American football. He had his hat handed to him in style. This is what has been happening to the regulators trying to manage energy and commodities speculation. The CFTC said yesterday that it would crack down on speculative trading activity. This is a repeat of what it said in 2008 when the regulator tried - and failed - to re-classify oil hedgers versus speculators as oil prices zoomed to $147.00. One of the major issues has been the CFTC’s method of categorizing commodities and energy futures market participants according to whether they actually have physical market exposure. In other words, if a company buys or sells physical oil, such as crude oil or gasoline, from or to another party then it is classified as ‘commercial’. A bank trading oil futures purely to make money would be considered ‘non-commercial’ or a speculator. These classifications have been in place for some time. Prop shops, hedge funds and bulge bracket banks have squirmed around them and are still trading huge quantities of commodities daily. Over a billion contracts of crude oil futures alone are traded on ICE and NYMEX every day. This is about 1,400 times the amount of actual crude oil produced globally. Speculators have deeper pockets than most hedgers so it is clear that they are trading the lion's share.
What the CFTC needs is teeth, and probably some bodies that understand how these markets actually work. I've said it before - it needs ex-traders. And it needs complex event processing technology to spot trading patterns and subsequent irregularities, especially if (as I am told) 30% of energy futures and options trading is now done by algorithms.