Are Speculators Really to Blame?

11/24/2011 9:30 am EST

Focus: COMMODITIES

Pratik Patel

Founder, Clear View Futures and The Futures Room

Active traders and speculators are being unfairly blamed for sharp price swings in the markets, says Pratik Patel. Without them, he says, wild price moves could occur even more often.

When there’s a lot of volatility in the market, you often hear that speculators are to blame for that, but is that really true, or is it supply and demand; what’s behind this? 

Our guest today is Pratik Patel; he’s here to talk to us about that. So Pratik, are speculators really the problem when it comes to really volatile markets?

I don’t believe so necessarily. I think volatility is going to be there regardless, and speculators are there to provide liquidity. Without the speculators, the daytraders, the algo traders, the market’s going to be very liquid and you’ll have a lot more erratic price swings. 

The traders there keep prices moving in an easy flow. If markets are moving up, traders are naturally going to buy it back up and move the market and make it more consistent and make it more easy going on prices.

Supply and demand also plays a key role in trading. Naturally, for example, if you have the USDA crop report coming up bullish, you’re going to have traders stepping in and buying the market.

So they’re going basically with the technicals and the fundamentals underlying the price movement, and I believe it’s just going to be the bulls and the bears trying to price the commodity out of what it should be and I don’t think that speculations are moving the market any one given way.

We heard a lot about this when oil was at $150, that speculators were all to blame for that, so the government tries to do things like position limits. Do you agree with them trying to step in and do something about it?

I don’t necessarily agree with that, either. For example, when oil was at $20 a barrel and oil companies were suffering, the government didn’t step in saying, “Oh, well, people need to stop selling and they need to start buying."

But when prices are going higher, they want to step in because it’s affecting the majority of the population, and in a way they’re right, but at the same time, you can’t blame the trader for doing it. If prices are naturally going up, traders will step in and buy the prices. 

We’re not sitting here knowingly pushing the market up. If I’m buying oil, trader A is buying oil, trader B is buying oil, we’re just naturally going with what we’re seeing in the market. 

Technically—I’m a tech trader—so if I’m seeing the market moving up, I’m going to join with it, and you never hear complaints about government stepping in or bands or lobbyists stepping in when the prices are down. 

For example, last year, corn was trading at $3.50 a bushel; one of the lowest prices in many years. Now it’s at $8, and now you’re seeing the government stepping in, and people trying to control that price. 

It’s always when prices are going up that they want to step in and interfere, but when they go down, they’re not complaining. But traders make money when the markets go up, and they make money when the markets go down. We just go with the flow of what we see.

There’s going to be no one person or group of people that can control price, so if we’re saying that there’s 1000 speculators buying oil, that’s not going to move the price up to $150. We’re just going with the natural flow of the market, and that’s the direction we take.

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