So.. I just read the thread suggesting the outlawing of margin trading. Someone raised the legitimate point that this would just limit the market to large players with tons of capital rather than eliminating speculation. So how about a sliding scale? If your total position is worth up to a million dollars, your margin is X per contract. If your position is 1 to 5 million dollars, it's (0.9 * x). 5 to 10 million is (0.8 * x), etc. This still lets small traders play as much as they can now, but reduces leverage as you get bigger. You could even waive the deleveraging (or reduce the amount of deleveraging) for hedgers. The CFTC already keeps track of hedging vs. speculative positions; just set up different margin structures for each. Would this work, theoretically, given that all futures markets in the world would do the same thing at the same time? (I'm more interested in how this change would affect futures market dynamics than the practicalities of international regulatory politics, so pretend we can wave a magic wand and make all the futures markets worldwide do the same thing.) How would this play out in the market if all oil exchanges did this tomorrow? I also like the idea mentioned of testing for speculation vs fundamentals by holding public hearings on whether margin requirements ought to be raised, to see if that makes oil drop 20% instantly.. R
No, the Free Market should do what it wants. Let Congress pay for their shortsightedness - printing M3 into the stratosphere makes bubbles. Listen, all the Central Banks did this. Check out M3 for the ECB, BOJ, BOE, BOC. All of them. This has been the era of loose credit. Now shits coming home to roost and Congress is looking for a Patsy. Thats you.
That is neither here nor there. All completely irrelevant. The question was: what would the effect of sliding scale margins based on aggregate speculative position size be on the dynamics of the oil futures market, assuming that all markets in the world made the change at the same time? Thank you.
I suppose it depends on the average hold period for Commercials and Institutions, which we could assume to be long. Weeks to Months. So, yes. It could work. The net effect would be limiting all invested monies to a lesser sum of contracts then before. The result, in a directional market, which we are now in, would be less pronounced moves. My point, is your point is moot. Regulation is not necessary. The market will play itself out. Oil is not going to 1000$ and Africans will be eating rice next year. The real culprit is money supply. When rates are raised, all these Commercials and Institutional funds that are geared heavy in commodities will fall like stones. And oil - along with everything else - will tank back to fair value. The funds that have driven oil to where it is (speculative side) generate garbage returns. They can't survive, let alone operate, without cheap gearing. When rates go up, they go outta business, liquidate contracts, game over. 75% of Institutional and Commercials can't beat the S&P. So this whole push for regulation is a complete joke. Its unnecessary. You want to see commodities lower, raise FED funds by 200 basis points and watch this bubble pop. Thats your answer. Not more regulation. But it was a fun thought experiment.
I am sure, like all of us, you have had to deal with a government bureaucrat or bureaucracy at some point in time. Why on earth would you want them "testing" to determine excessive speculation or if a market is behaving within the "fundamentals" The Exchanges are free to raise margin at will, any time the want too. Keep Ceasar out of the markets !
I think the Clinton administration failed us in the Dot Com Bubble but even worse, GWB who is only playing CIC totally ignored the ramifications of the U.S. Housing bubble. Now the Fed in the foolish response to lower rates, which killed the dollar, gives us in part this oil bubble. Companies with nothing on paper, Dot Com Bubble, Houses backed with ridiculous lending policies, Housing Bubble, and now oil speculation on margins. Run away free market capitalism just seems like a monster at times that can turn on its creators. Maybe when it comes to bubbles without backing, the government should take some action to at least be sure the investors can back their investments. I think something the the sliding scale or margin restrictions might be what is needed but I don't see this administration taking any such action in this election year. My guess is, neither do the speculators. Pete
Thanks for the replies. I agree that, left to its own devices, the market will eventually work itself out. However, the interim effects before it finally does will be devastating and socially unacceptable. "The market can stay irrational longer than you can stay solvent." Given a choice between intervening to shorten the speculative bubble, and potentially letting thousands or millions of people starve to death in the meantime (not to mention the economic damage wrought by overpriced oil) just to be an uncompromising free market purist... I'm going to go with intervention. A few hedge funds and investment banks making their profit targets so their already-rich clients can get richer isn't worth mass famine and recession, not to mention the potential unseating of the USA as the world's #1 economic power (for those of us in the USA and the US regulators.) Money supply is certainly an important aspect of how to intervene, and ought to be carefully used, but I think a more comprehensive strategy is necessary than just that one tool. To that end, I proposed sliding-scale margin. Part two: it wouldn't work if it was just done in the US, for reasons pointed out in the other thread - people would just transact their futures bets in Dubai or London. But the US still has lots of political and economic leverage, and could well twist their arms to get them to implement a similar system - for the time being. If these conditions continue, the capital base and eventually the power of the US will eventually erode and travel overseas, leaving the US in a far worse bargaining position to promote these kinds of regulatory devices. Better to act now and bargain from strength. Cheers, R