Tuesday, September 23, 2008

Speculation's moment of Truth

Stephen J. Obie, acting director of the Division of Enforcement, said his staff "will scour today's trading activity to determine whether anyone engaged in illegal manipulative activity. No one should be trying to game our nation's commodity futures markets."

Perhaps my memory isn't what it used to be. After all, it's been more than 20 years since this Philosophy and Physics student first started trading futures. But I seem to remember my bosses telling me how important it was- as we were speculators, not end users- to "clear up" futures positions before the last trading day of any contract. To be short a future after the last trading day is to be willing to deliver the underlying commodity and to be a long a future is to be willing to accept delivery of the underlying commodity. The last trading day of any futures contract is the moment of truth, when speculation ends.

Yesterday was the last trading day for October Crude Oil. As the day wore on and the moment of truth loomed the price soared, in my view, because there were many speculative shorts who didn't have oil to deliver. As the moment of truth nears, the question, "where's the price going to go?" is replaced by "do you have it to deliver or are you willing to accept delivery?" That is, contra the implication of Mr. Obie's view above, the rapid rise was not due to speculation, but rather to the end thereof. If the CFTC wants to probe for manipulation they should be looking into the actions of those who had been selling earlier in the month.