Commissioner Chilton Speech: "Kaleidoscopes" (with Lofchie Comment)

CFTC Commissioner Chilton gave a speech in which he repeated the themes he has emphasized in the past: (i) that "massive passives" drive up the price of commodities to irrational levels and (ii) that high-speed traders have an unfair advantage over low-speed traders.

Lofchie Comment: Commissioner Chilton attempts a very important task, which is to link economic theory to regulatory policy. I don't think that one can meaningfully debate regulatory policy without some view of economic theory. In fact, one of the themes of his speech is that different people may perceive the same events (or the market) differently based on their own perspectives. Consistent with Commissioner Chilton's openness to opposing views, even directly opposing views, I hereby offer up some contrasting perspectives. As to the fact that massive passives inevitably drive up the price of commodities, here is a link to a story from today's Washington Post titled "Stocks, commodity prices fall sharply as traders worry about a slowdown in China's growth." As to the theory that passive long positions in derivatives drive up underlying commodity prices, here is a contrasting view from Paul Krugman. As to the view that high-speed trading is bad because it allows a fast trader to take action ahead of a slow trader, what regulatory policy is Commissioner Chilton advocating as a corrective measure? Perhaps he is asserting that all traders should use the same technology so that none has an advantage over any other, but he has not stated exactly what steps he would take to slow down those who have better technology. Further, it seems inconsistent with an American view of fostering competition in markets for regulators to prevent the use of a technology simply because it was faster or better.

View speech in full here (links externally to CFTC website).