Investors, told to stop speculating on EU government bond defaults, promptly begin the search for a different investment vehicle that will allow them to continue trading the same outcome. Bank regulators are increasing capital requirements after ongoing fraud and poor decision making shows no signs of subsiding. Barclays sets aside more money to pay fines for allegedly having “done an Enron” to the US power market. Take a look at First Read and the Exchanges section for a rundown of October exchange volume numbers; the first wave of reports suggests a continuation of the familiar pattern of, “Overall pretty lousy; in a couple of places, downright awful; and surprisingly good bright spots here and there.”

By John J. Lothian

I am not a futures broker… anymore that is.  Wow!  What a feeling!  (See Taking My Own Advice from Friday for why.)

Since 1984 I have worked for a futures brokerage firm, been a futures broker, or a proprietary trader.  Of course, since 2000 or 2003, depending on your perspective, I have been in the media business too.

As a futures broker, you have a lot of risk.  Your clients are risk takers.  They are speculators who have assumed the risk of hedgers.  Or, your clients are hedgers.  And they are laying off their cash market risk in the futures markets.

By John Lothian

As I was listening to one of the High Frequency Trading subcommittee reports at the Technology Advisory Committee Meeting  of the Commodity Futures Trading Commission a week ago, I took umbrage at some of the language being used to describe trading.

Specifically, I mentioned that I abhor the use of the words “bet” or “betting” to describe what a speculator does.  My words startled one of the subcommittee members who was delivering the report.

I said, there is a difference between betting and speculating.  I then gave my definition of each.  Betting is the creation of risk where there was none before.  Speculation is the assumption of risk that previously existed.  I gave the example of saying “I bet I can run faster than you” to explain betting.

A speculator speculates.  They assume risk in a market that another participant does not want to hold any longer.  Long hedgers need speculators willing to be short.  Short hedgers need speculators willing to be long.  Other speculators need other speculators to give them the liquidity to change their minds about the market direction.  All of this is assumption of risk for a contract with a viable economic purpose where some participants have an economic interest in the underlying instrument or commodity and the speculators have a view of the value of the same.

The City of London starts a working group with banks to help them expand their already-in-motion plans to trade yuan in the city. Startup trading venue Quote MTF plans to provide the ability for traders to decline to participate with specific other parties, to help mitigate the influence of high-frequency activity. In the “Well, we have to do SOMEthing” department, the Obama administration adds their nomination to throw speculators under the oil-price bus. And in a jam-packed top section, you’ll find links from John Lothian on charitable giving; comments and links to oil-speculator-related articles; commentary from Jim Kharouf on the resurgence and potential value of the Occupy Chicago movement; and commentary from Doug Ashburn in yesterday’s JLN FX newsletter, discussing the situation in the eurozone.

Anthony Neglia is president of Tower Trading of New York City, an open outcry floor brokerage firm specializing in options on precious metals at the New York Mercantile Exchange (NYMEX). His commentary regularly appears on CNBC and TheStreet.com. John Lothian News editor-at-large Doug Ashburn spoke with Neglia about volatility in the metals market, position limits, the role of speculators, and the future of the metals space.

From JLN Metals:

Keith Goggin is a partner at Integral Derivatives LLC, the largest options specialist firm on the NYSE/Amex options marketplace. He has been a market-maker and specialist in options on ETFs since their inception. John Lothian News editor-at-large Doug Ashburn spoke with Goggin about the seventh anniversary of the Gold ETF contract, the role of speculators, high market volatility, and the future of ETFs.

by Douglas Ashburn, John Lothian News

Normally, one would not list CFTC meetings among top choices in televisual entertainment, but yesterday’s open meeting was a relatively raucous affair. The final rules on position limits, which required the cancellation of two prior meetings in order to give the commission extra time to hammer out the specifics, squeaked by on the narrowest of margins, clearly the result of some last-minute “horse-trading” back stage. A final rule covering derivative clearing organizations (DCOs), which also passed 3-2, was equally contentious. Additionally, the commission voted to extend the effective date for certain Dodd-Frank provisions until July 16, 2012. Commissioner Chilton quoted “Huggy Bear” from Starsky & Hutch. And, at one point, the room joined together in a song, which was led by Commissioner Dunn.

No; they did not sing “Kum-ba-yah” – they sang “Happy Birthday” to Chairman Gensler, who turned 54 yesterday. Under normal circumstances, upon hearing Mr. Dunn’s rendition, I would have suggested he not quit his day job. However, as his time with the commission is done, pending the confirmation of his successor, it seems as if he has already quit his day job. Chilton’s Huggy Bear reference, by the way, was the line, “I lay it out, so you can play it out,” meaning the commission must follow the mandates laid out by Congress in the Dodd-Frank Act.

By John J. Lothian

(Recently 12 Senators wrote to CFTC Chairman Gary Gensler urging him to apply higher margins to the energy markets to “restore integrity.” Here is my response:)

Dear Senators:

I applaud your concern about the impact of rising oil prices on American consumers.  No one likes paying more for something than they think it is worth.

Your letter to CFTC Chairman Gensler suggests you have the answer for the higher prices we are currently experiencing.  Your answer seems to be to facilitate less buying by speculators through imposing higher margin requirements for speculative trades.  While that could have the short-term effect you desire (or not), the long term impact would be worse.  Limiting the participation of speculators will make price movements and volatility worse.  Legitimate hedgers seeking to offset their risk will find fewer market participants to take the other side of their trades.  Their cost will be more friction, as there is less grease applied to the markets by the speculators.

by Jonathan Matte

Read part 1 here.

In Episode One of the quest for red herring futures (published in this newsletter last Monday), I talked about the need to properly identify a problem before it can be effectively fixed. Failing to do so often leads to a toaster-jerk reaction, which looks pretty foolish and has no better than a pure-accident chance of making things better. I also promised that I’d explain how the presence of speculators cannot be a base cause for high prices or extreme volatility in a market. As I always keep promises that are convenient, let’s get started.

Please note that at no point have I stated that speculative activity is unrelated to volatility or price change. It’s not only related, it’s one of a limited set of vehicles specifically designed to realize such behavior. What I’m saying is that barring exceptional cases like willful fraud or manipulation, it cannot be a root cause. Allow me one analogy to explain. Since heat is a popular topic here in the arctic in winter time, I’ll work with that.

by Jonathan Matte

Read part 2 here.

I read Bart Chilton’s commentary about speculators and speculative limits as it went into the Friday edition of this newsletter. In my new practice of staying calm and even-headed when reading government-related editorials, it took several seconds and two whole paragraphs before I ignited my Flamethrower of Righteous Indignation and began to scorch the side of John Lothian’s head from clear across the Atlantic Ocean. John felt it more appropriate for me to share my “insights” with you, if only so he could get me to shut up and let him get his work done.

I have a lot to say about speculators and how they are viewed as market participants. I will tell you right away that I can and will try to disprove the notion that speculators are the “cause” of futures market volatility and high prices in general (one of several vehicles, yes; the cause, no). In part 2 of this miniseries, I’ll begin the process of explaining myself. Jim Kharouf commented last week that the financial industry isn’t sufficiently educating the public, and I wouldn’t be taking his perspective to heart if I simply said that, “many studies, papers and quotes,” supported my position. That would be the mark of a sloppy analyst, in my opinion.