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Why financial participants matter to the commodity markets

Trabue Bland
SVP, Futures Markets, ICE

Futures markets, and the global derivatives markets more generally, have a long history around the world with origins in the U.S. agricultural markets in the mid-19th century. The futures markets in particular have since evolved and matured gaining further momentum with the electronification of these markets during the 1990s -- and serve two primary purposes. The first being efficient and transparent price discovery as a broad spectrum of buyers and sellers interact to express their opinions. The second purpose, and perhaps more important, is the efficient transfer of price risk with minimal costs from participants that wish to lay off risk to ones that are willing to assume this risk.

Despite the vital economic function that exchange traded derivatives play in permitting hedging and price discovery in a range of markets for energy and raw materials, there have been time and again voices that blame “speculators” for high prices and volatility. These voices tend to grow louder when prices are high and claims are often made without evidence that speculative activity has moved markets away from their fundamentals by distorting prices and exacerbating volatility. In this paper, we shed light on the critical role that financial participants and liquidity providers play in the proper functioning of futures markets as enablers of price discovery and risk transfer, and how this benefits all participants by boosting liquidity and reducing transaction costs. And, furthermore, we use a number of practical examples from the global futures markets that ICE operates, including physical commodity markets, to make our case.

We also touch upon the topic of market manipulation with its detrimental effects on the markets -- and how manipulation is not the same as speculation, but often mixed up with speculation. The paper provides insights into the robust controls that ICE has implemented in the form of market supervision, price movement controls and position limits to detect and deter market manipulation.

Read the full report

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