"I found myself on the opposite side of the arguments in regard to speculation in agriculture commodities as well as the high frequency trading. As they say "don't shoot the messenger". Speculators don't cause the higher food prices. They don't create trend they merely create volatility. I am not even sure higher food price is a bad thing. China has 800 millions peasants. Higher agriculture prices should not be bad for them.

"Nor would it be for US as the largest food exporter. I am also puzzled with your comments on high frequency trading. What's the difference between a high frequency trading robot and a human market maker on CME or NYSE? Is the human trader more ethical than the machine? I doubt it. For both issues as long as there is transparency, not a problem for me. Just my humble opinion."

David Fuller's view Thank you for making some very good points, not least regarding poor farmers who would benefit from higher food prices. To this I will add, provided they are able to harvest their crops and sell at close to market prices. I agree that speculators do not cause the fundamentals behind higher food prices and ideally, speculation just adds liquidity which might actually reduce volatility by making it easier for food producers to hedge positions.

Theoretically, if somewhat idealistically, every speculator who is buying when prices are low is helping to support the market in its time of need, and selling that position when prices are high and the end users in need of supply. I have been making this point since the 1970s but the situation is somewhat different today, due to the proliferation of hedge funds and commodity tracker funds in particular.

Today, it is quite possible for a tsunami of money to swamp a comparatively thin market, previously dominated by the commercial producers and consumers of commodities. These were never intended to be investment assets and when a fashionable tracker drives up the price of a commodity, it will do so across the range of futures contracts. In addition to raising the cost of food for everyone else, this can also damage the finances of commercial participants, including farmers, who may have sold their crop forward and find themselves under financial pressure to meet margin calls on prices driven higher by buy-and-hold funds.

Of course a large concentration of speculation, often fuelled by an excess of liquidity, will drive up prices. That is why we have had periodic bubbles over at least the last 500 years. These have become more frequent as we have already seen in this century with the Nasdaq bubble in 2000 and numerous property bubbles over the last few years. We also had the commodity bubble of 2008 which also collapsed that year but is inflating once again.

Lastly, investors need to protect their purchasing power, and participating in markets that have both the fundamental foundation and appeal to become bubbles is a very good way to profit, provided one does not overstay. As speculators, there is a point at which we need to be careful of what we wish for, and we need to remember the Law of Unintended Consequences. When institutional investors in particular were piling into crude oil tracker funds in 1H 2008, and excitedly talking the price higher, few were considering the cost to the global economy of another spike in that most important commodity. That may happen again, even though regulators and central banks are more aware of the risk.

For me, this debate is 'déjà vu all over again', as it also featured in 1H 2008, mainly when discussing commodity tracker funds.


On HFT, which was discussed at length in Fullermoney last year, I do not assume the human trader is more ethical than the robot, although the first responsibility of the former NYSE 'specialists' was to maintain an orderly market. My main concerns over HFT are: the crowding out of other participants with many thousands of bids and offers, the capacity for market distortion and the lack of transparency.

I will add that little of this affects me personally as a private investor, so far, but I think the capacity for market distortion grows when the robots account for most of the daily volume.