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Nicolas Maystre: Study shows relationship between food price volatility and high frequency trading

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

A study suggests that price volatility of commodities like food, oil, stuff we use every day, a lot of that price volatility is coming because of the amount of speculation involved in the commodities markets. Yes, there’s more demand from India and China, yes, natural events like the drought in western United States plays a role. But speculators, financialization of the commodity market, is a major factor in this price volatility, and according to our next guest, something should be done about it.

Now joining us from Geneva is Nicolas Maystre. He’s an economic affairs officer in UNCTAD, the United Nations Conference on Trade and Development. And he works in the area of financialization and commodity markets. Thanks for joining us, Nicolas.

NICOLAS MAYSTRE, ECONOMIC AFFAIRS OFFICER, UNCTAD: Oh, thank you very much. It’s my pleasure.

JAY: So, Nicolas, let’s just start with the basic statistic that 85 percent now of the money involved in hedge funds and hedging in the future markets is speculator finance money. About 25 percent of that is actual end-user. So, quickly, why is that a problem? And then we’ll talk about what can be done about it.

MAYSTRE: The problem with the financialization of commodity market is that, I mean, you have now a very large part of the participant that are financial investor or speculator, no matter how you want to call them. The problem is that, I mean, these persons may in fact destabilize the price formation on commodity market and create somehow the wrong signal for the people that are really interested or physically interested in those markets. So it might create the wrong signal for the producer, prevent them to embark into new infrastructure project. And ultimately, I mean, this growing volatility might, I mean, destabilize those market. And that’s the key issue there. And when you have, I mean, the prices of commodity that no longer reflect, I mean, their fundamentals, yeah, that creates lots of uncertainty on those market. And yeah, it’s not, I mean, the way a market should function.

JAY: And part of what you looked at is these high-frequency traders that come in for short-term bets, sometimes a matter of seconds, sometimes a little longer, but massive amounts of money coming in and coming out of the commodity markets. And your point is that this idea that—of what they call price discovery, that people should have some idea of the fundamentals so they can have some sense of where price is going, that’s all distorted because of this kind of financialization, and particularly what some people call cheetahs, the high-frequency traders.

MAYSTRE: Yeah. I mean, the problem is that if you have people, I mean, somehow, who will respond, I mean, or who act on commodity market based on what is, I mean, at the end just a portfolio strategy, an investment portfolio strategy, clearly, I mean, it can, I mean, send the market into the wrong direction. That can be either the result of algorithm traded at very high frequencies, but it can also be, I mean, just, I mean, a pension fund investing on sugar to diversify its portfolio And this will somehow have an impact on the price formation on those market. And when you have actors that don’t have any specific interest in the physical product—.

JAY: I was told by someone who knows that Goldman Sachs apparently has more than 500 people that do nothing but sit there and write algorithms for high-frequency trading. So it’s a massive operation, this. So if this kind of trading is distorting prices, introducing volatility, and more often than not raising prices for consumers, then what should be done about it?

MAYSTRE: Yeah. I mean, clearly, I mean, the first thing is to increase the transparency on the financial commodity markets who are the financial—who are somehow the key players, to look at the position and to have information about the position of, I mean, significant market participants, at least for the regulator, so he can then, I mean, summarize this information and give it to the public. So that’s one thing that needs to be done, I mean, is clearly to increase the transparencies.

The other thing is to tighten the regulation of those financial actors. I mean, here we can think about several measures. [snip] to ban certain types of investment vehicles on commodities market. We can also, I mean, ban property trading by financial firms that are also involved in hedging somehow the position of their client, because here if—you have, I mean, an asymmetry of information problem. I mean, if we are convinced that high-frequency traders and financial investors are, I mean, not providing a good input for this system, you can also, I mean, think about the creation of a financial tax, tax on financial transaction.

JAY: Yeah, the people that are supporting the financial transaction tax—the nurses are calling it the Robin Hood tax—that’s one of their arguments, that this will have a beneficial effect on slowing down these high-frequency traders, ’cause they operate on such small margins with a lot of money, but if you tax it, it takes away some of the incentive for doing it.

MAYSTRE: Exactly. Yeah. So that’s the same idea that was somehow at the beginning promoted for the currency market that are also very volatile. But, I mean, these kind of mechanism can also be established on commodity market.

And, I mean, ultimately, if none of those solution are satisfactory, you can also, I mean, think about a direct intervention from the surveyance market authorities. And, I mean, in the case of the currency market, for instance, I mean, the Swiss national banks had at some point, I mean, decided to intervene and to say, okay, I mean, starting from now, the Swiss franc will no longer appreciate against the euro, because it’s completely against the fundamentals. And, I mean, we can, I mean, think also about the same type of intervention from the surveyance market authorities with direct intervention.

JAY: So you’re talking about something—I mean, I guess it wouldn’t be the Fed, but something with the actual wherewithal to bet against bubbles. If they would see a bubble being formed because of this kind of speculative trading, they would actually just bet against it in order to stop the bubble from forming.

MAYSTRE: Of course it would not be the Fed. I mean, that has to be done internationally and it has to be coordinated. So, I mean, right now I don’t know, I mean, [incompr.] somehow what will be somehow the specific regulatory body who will implement that. But, I mean, if there is the political willingness to do so, I mean, that’s something that is entirely feasible.

JAY: And, of course, that’s the big issue is that there seems to be no political willingness for reining in finance, in the sense that finance has such political power now in all the main capitals of the world that any regulation gets so watered down that—I mean, isn’t that the underlying issue here?

MAYSTRE: Oh, sure. But, I mean, that’s, I mean, why we are continuing, I mean, our research and somehow, I mean, pushing for those ideas. We know that you have many, I mean, interests that—I mean, and many actors who don’t want any regulation. But that’s like, you know, many other places. And, I mean, ultimately, we know that—I mean, the latest example of the financial crisis, I think, should convince us that, I mean, no regulation is ultimately no good.

JAY: One would think so, but about half of America that votes apparently is ready to vote for a president that wants less regulation. And, of course, the current president talks about regulation, but didn’t promote, really, that effective a policy.

MAYSTRE: I don’t know all the specific issues regarding the U.S. economy, but looking at Europe, I mean, it is clear that, I mean, things are moving slowly. I mean, of course we would like them to move at a faster pace, but—well, so we are continuing our work.

JAY: In the next year or two, people are predicting a major rise in food prices. So perhaps there’ll be more interest in this. Thanks very much for joining us, Nicolas.

MAYSTRE: Well, it was my pleasure. And thanks again for your time.

JAY: And thank you for joining us on The Real News Network.


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Nicolas Maystre is an Economic Affairs Officer in UNCTAD, Division on Globalization and Development Strategies. His work areas include the relationship between international trade and inequality; the links between trade and culture; and the financialization of commodity markets, on which he has authored several publications. He holds a PhD in economics from the University of Geneva, Switzerland.