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More Evidence: Speculators Don't Cause Volatility
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Prices were outrageously volatile. While traders attributed the sharp market movements to supply and demand, most politicians in Washington were sure that speculation was the culprit. The U.S. public became incensed.
The year was 1958, the commodity in question onions. Congress held long and sometimes tumultuous hearings in which Everette Harris, then president of the Chicago Mercantile Exchange, tried to convince lawmakers that the futures market for onions was not the cause of the volatility.
“We merely furnish the hall for trading . . . we are like a thermometer, which registers temperatures,” Mr. Harris told a hearing. “You would not want to pass a law against thermometers just because we had a short spell of zero weather.” But such arguments were ignored and in August of that year the Onion Futures Act was passed, banning futures trading in the commodity.
Exhibit A: Notice in the top chart above that the price volatility for onions looks greater AFTER futures trading was banned than it was before.
Exhibit B: The same patterns exists for the second chart of wheat futures - there was greater price volatility WITHOUT futures trading than with futures.
Exhibit C: Research by Lehman Brothers shows that prices for metals that are not traded in exchanges, such as chromium, molybdenum or steel, have risen faster than prices for metals traded in exchanges, such as copper or aluminium (see bottom chart above). In addition, some of the commodities markets in which pension funds hold the largest share of outstanding contracts, such as hogs, have seen price drops.
Home > Articles > The Markets > More Evidence: Speculators Don't Cause Volatility
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