Do Speculators Actually Help ETFs?

Commodity exchange traded funds (ETFs) have gotten harsh criticism over the past few weeks, as the Commodity Futures Trading Commission (CFTC) has held hearings to suss out the exact role speculators had in sending prices through the roof.

The latest regulatory limits placed upon commodities futures and ETFs has been enforced mostly to reduce the volatility within these markets, and to alleviate the rapid price swings. Speculators took most of the blame, and it seems that regulators believe that the regulation of speculators within commodity markets will help calm the prices and volatility, explains Jonathon Hoenig for SmartMoney.

But will it?

Many believe that speculators actually serve a valuable role. The speculative futures market may actually reduce volatility rather than create it, and regulators are actually messing with free trade as they limit the number of what can be traded. The regulation will not necessarily eliminate market volatility by enforcing regulation, but they may make it worse.

Prices rise and fall based on supply and demand, regardless of whether politicians ban futures trading. Investors will simply migrate to unlisted products or offshore exchanges, and who can blame them?

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