I came across this interesting speech by CFTC Commissioner, Bart Chillton.

In this speech he gives three loopholes exploited by future market traders – Enron loophole, London loophole and Swaps loophole. Basically all have a similar theme- one market is regulated and other is not and both have near similar products. The regulators can only watch the former and the traders switch and build volumes in the latter.

This is actually problematic as because of innovation, one can create similar instruments in another exchange and build up positions (he explains that is what Amaranth traders did). Now what should a regulator do? He says we need more cooperation between regulators.

His take on whether speculation is driving prices:

The issue comes as speculators have increased their participation in the futures markets, primarily through swaps dealers, in an unprecedented fashion. In fact, at least $250 billion dollars has come into these markets in the last several years and the question that many people are asking is whether or not that influx of capitol is having an influence on the prices of oil and other commodities.

I’ve had the opportunity to discuss this issue with a lot of really smart people and I can tell you that a lot of them disagree.

Personally, I don’t see how $250 billion dollars doesn’t have a thumb-on-the-scale effect on prices. That’s an astronomical amount of money invested in commodities as an asset class—a new type of investment strategy in the futures markets and different approach applied to commodities trading. But, again, a lot of smart people disagree about the impact.