Since the financial crisis began, banking institutions and speculators alike have been criticised for their involvement in the global economic downturn.
Their presence within commodity markets has been similarly frowned upon by regulators and campaigners.
The European Parliament’s Markets in Financial Instruments Directive rapporteur Markus Ferber has disparaged speculation, stating he will do his utmost to make sure the market is used for its original purpose – the physical movement of gas.
The World Development Movement, an inequality campaign organisation, claimed the “commodity markets are broken”, and that increasing financial speculation has “distorted prices away from expectations of supply and demand”.
The truth is quite the opposite. It is the involvement of these “devious speculators” that is keeping the gas markets in line. Speculators attempt to buy when prices have fallen too low, or sell when prices are too high, in effect keeping the market in equilibrium. They provide more accurate prices for the commodity by increasing liquidity in markets which would otherwise be opaque and devoid of trade.
The key to market efficiency is information transparency. By increasing the number of participants active at a trading point, transparency will grow. Of course, in some cases, certain counterparties may attempt to distort the market for personal gain; however, it is actually the removal of such participants from the marketplace that could spell doom.
Under Ferber’s suggestions, financial speculators would be banished from the market, leaving only utilities to buy and sell gas or, as he said, restoring the market to its original purpose.
However, this would leave clear opportunities for larger companies to collude and dominate the market. In numerous European countries there is a handful of utilities, or in some cases monopolies, which control the market, while smaller companies struggle to compete.
It has been proven that distortion in a heavily speculated market will be resolved far sooner than in an illiquid one.
Leaving smaller firms to attempt to buy or sell gas in an illiquid market dominated by a few large companies would be sending lambs to the slaughter.
One UK utility, not part of the infamous ‘Big Six’, told Interfax: “They would absolutely run rings around us. It is hard enough to compete now, but at least there is some liquidity. If it is just us and them, you can forget it.”
Rather than limiting the amount of trading parties in the marketplace, regulators should be supporting their inclusion. The more traders in any given market, the more opportunities there are for other buyers or sellers to deal, offering smaller companies a chance to compete on what would otherwise be an uneven playing field.