Bart Chilton Pt.2: Massive spikes in price of food, oil, natural gas and silver cannot be the result of supply and demand
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. The average retail price of gasoline at the pump in the US, excluding taxes, in May was $3.96. In January 2009, the average retail price was a $1.96. In other words, consumers are now paying twice as much to fill their cars as they did two and a half years ago. Meanwhile, the FAO global food price index for June was 39 percent higher than June 2010. The upsurge in global food prices has created food emergencies and spread malnutrition throughout the developing world. To what extent is all of this the result of speculation? Now joining us to unpack all of this is Bart Chilton. Bart is a commissioner at the Commodity Futures Trading Commission in Washington. Thanks for joining us again.
BART CHILTON, COMMISSIONER, CFTC: Sure, Paul.
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JAY: So how much is speculation driving up the price of food?
CHILTON: Well, I think it’s having an impact. A lot of people use this word driving the price of food and/or energy, and I’m not so sure that they are driving the price. I think they may be hurting and pushing the price higher when they’re in the markets, and sometimes lower, actually, when they’re getting out of the market, and that it pushes prices beyond what they would normally be, and it stays there for longer than it would normally be. And I think that’s the case in some ag commodities that impact food prices, and I think it’s the case with regard to energy. If you look at where we were back in 2008, where a crude oil touched $147.27, there’s no supply-and-demand reason why that price should have been so high. What we do know is that there was a large increase in speculation in these markets. And if you think it was bad then, or it might have been bad then, since that time, June 2008, we’ve seen speculation increase by 64 percent in the energy markets to an all-time high this year; in the agriculture markets, roughly 20 percent increase in speculation since 2008; in the metals markets, roughly a 20 percent increase in speculation since 2008. So speculators are in the market. Don’t get me wrong: you need speculators. You don’t have a market without them. The question is: is there an appropriate role, and is there some sort of limit that we should have? I think there should be. Congress thinks there should be. They’ve told us to put limits in place. And we are going to get at it.
JAY: You’ve given some examples of–when we were talking before, of how some of the flash speculation works and some of the crazy shifts, ’cause you’ve got a body of what’s–academic research that’s claiming speculation doesn’t affect spot markets, that spot markets are what they are, and the people win or lose their bets, but there’s not a real interaction there.
CHILTON: Well, two things, Paul. One, we’ve seen some anomalies in markets just this year that I think are a little bit inexplicable. And I like to look at a certain group of traders that I call cheetahs. These are high-frequency traders that try to make quick decisions to gain microdollars in milliseconds. So if you look at May 1 of this year, 6:15 in the evening, on electronic trading, the silver market went down 12 percent in 13 minutes–12 percent in 13 minutes. You’ve got to think, well, who’s trading so fast that could move a market and make it so volatile? But I’ll give you even another one. On June 7, the natural gas market on the New York Mercantile Exchange, 7:40 p.m. in the evening, electronic trading, in 14 seconds–seconds, 14 seconds–the market dropped by 7 percent. So I’ve got to think that these high-frequency cheetahs, these fast folks that are just getting in and out of the market, may have had something to do with it. Now, I’m not making any–pre-judging, making any determination that they did, but just common sense tells you to look at those folks. So all of these new class of traders–the cheetahs, along with the massive passives that we’ve talked about, these long-term investment folks who get in the market different than they had in the past–they’re all traders that we need to look at anew and realize the impact that they are having on markets.
JAY: To have enough of the kind of capital it takes to affect markets at the level you’re talking, it’s enormous amounts of money. You’re talking the big banks. At least some of this has to be big banks.
CHILTON: Well, there’s different dynamics, Paul. So if you look at these massive passives, they’re massive for a reason: they are large, they are–lots of money, and they have a fairly price-insensitive trading strategy. They get in the markets and stay in markets just like some of our parents would get in and buy IBM stock and stay there for 20 years. That’s a different trading strategy. The cheetahs, these high-frequency traders, they are in and out lightning fast.
JAY: But to make it worth it, you’ve got to be in and out with a lot of money, or you’re not making enough to be worth it.
CHILTON: Yes, but you only have to be in for a short period of time. The high-frequency traders, these cheetahs, are primarily proprietary trading. They’re individual companies that are trying to make miniscule amounts of money on just small market moves. And my question: is this helping markets? Is it helping discover a true price for consumers, a fair price, if you will, for consumers? Or are these guys really just sort of parasites on the market? And I’m not willing to make that argument 100 percent, but I’m leaning that way, because what I see so far tells me that I’m not sure the value they’re creating in the market. There’s one large bank that has 35,000 employees, and 1,000 of them are working on high-frequency trading type issues with regard to their programs. And these are mathematicians and PhDs and some physicists. So, look, there’s clearly a trend towards understanding that this is a profitable trading venue. These are a new breed of cat, these cheetahs, and it’s something that we’re going to have to address. And I hope we do so soon.
JAY: And you’ve got the regulatory authority to do it?
CHILTON: We do. We’ve got to have the sort of wherewithal to monitor it, and we’ve got to have the political support on the commission. There are five commissioners. I’m just one. So we’ve got to have at least three of the five commissioners to do anything. But I think it’s an area of regulation that we need to move forward on in a thoughtful way, in a careful way. I don’t want to make any predetermined decisions about how everything should be, but I think we should test these programs to make sure that they work. I think that we need to have some sort of accreditation process to make sure that these cheetahs who come into these markets aren’t interested in financial terrorism. I think we have to have kill switches, so that when these programs potentially go feral and start operating like we saw in the flash crash, May 2010, May 6, 2010, that they somehow can shut these programs off. There’s a lot that we can do that I think we do know, but I think there’s even more that we need to look at.
JAY: You called some of this excessive speculation is parasitical. You used the term financial terrorism. Those are strong words. Why?
CHILTON: Well, Paul, a lot of these folks, you know, we don’t know who they are. For example, if you look at the high-frequency traders, these guys I call cheetahs, the number-three trader by volume on the Chicago Mercantile Exchange is based in Prague. Now, I’m sure that that trader is fine. But who’s to say there’s not Osama bin Laden’s relative who is involved in these markets and trying to create an economic calamity for us? So it seems to me we’ve got to do some basic due diligence.
JAY: You don’t need an Osama bin Laden. You just need somebody big that’s betting short.
CHILTON: Absolutely. But you get–the point is is that we need some basic due diligence to know who’s trading in these markets. They’re so important to our economy, they’re so important to consumers, there’s got to be some basic safeguards.
JAY: So it goes back to the same issue as in part one: is there the political will? Are you going to have resources? Are you going to actually be able to write these regulations in time before you, as you said in the first interview, run out the clock? I mean, what is the real politics of doing this?
CHILTON: Yeah, you’re right. It’s the same old song and dance. We’ve got resource issues for people and technology. We’ve got the political will to do some of these things that, like the HFT’s, the cheetahs, there’s no requirement that we address them. That’s us taking it upon ourselves to say that something needs to be done. And I think in general that’s a problem with how government operates. All too often we’re like the fire department: we come in after a catastrophe and hose down the charred remains. We need to be more like the police department, looking around the corner, thinking about what might be happening in these markets. And the cheetahs are one area where I think we need to be nimble and quick and think how they’re–what they’re doing and make sure that consumers aren’t being impacted in a negative fashion.
JAY: So in the next segment of our interview, let’s talk about your commission and whether, given the politics and the resources, you can actually fulfill your legal obligation under Dodd-Frank. And please join us for the next segment of our interview with Bart Chilton on The Real News Network.
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