Wall Street and the potential to manipulate commodity markets

Bloomberg's Bob Ivry looked at the potential for Wall Street to manipulate commodity markets and highlighted the key issue: opacity.

Because of opacity, market participants cannot see and help the financial regulators assess the extent to which Wall Street is manipulating commodity markets through its participation in the physical markets.

“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” [US Senator Sherrod] Brown said in an e-mailed statement. Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.... 

Now, “it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, “Merchants of Wall Street: Banking, Commerce and Commodities.” 

The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview. 

“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing. “No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”