Selective leak of sensitive information vexes traders

Any economist worth his salt would say that prices are derived by interaction of supply and demand. However … commodity traders would differ……. Laws of supply and demand have been broken down…commodity prices in Gold, Energy, Base Metals, Wheat, Coffee and Soybean are mere speculation on trends and information. Today’s prices are determined by a process which is so opaque that only a handful of companies, banks, traders and brokers have some idea as to who is buying and who’s selling. This sets the physical prices in a strange new world of “paper information” on commodities.

Indian companies have done this slightly more innovatively. A large number of powerful companies get prior access to non-public information from government sources. It is widely known which business houses have benefitted from access to non-public information. Generally, employees of the govt. are barred from sharing insider information. The monthly quotas, crop production estimates, duty structures etc are prepared behind locked doors. Staff faces suspensions and prison for breaching confidential information. However, the companies remain scot free… There is hardly any law to prevent its misuse.

One of the most notorious insider trading scandals to hit commodities markets involved a dealer, a statistician and a window blind. In 1905, a trader by the name of Louis Van Riper was in cahoots with a USDA statistician E S Holmes who raised or lowered a window blind at department headquarters to signal estimates of cotton acreage before their official release. After the scam came to light, the USDA tightened its procedures for releasing market-moving supply and demand estimates and crop reports. But Van Riper’s actions, using misappropriated government information, remained legal. 

Institutional manipulation of Supply & Demand data has been a scourge during the recent past. The data abuse for agricultural commodities has been mainly on the supply side while industrial commodities faced abuse on demand side. However, this too went through an innovative process with stories about Corn and ethanol (from sugar) blending. Such abuses have created decision making traps for commodity players. The researchers of broking houses, “gurus”, associations, agencies and funds have created information and news hypes leading to large price swings in the market. At a time when crude oil was surging there was a data buzz of new reality hitting the energy markets at a feverish pitch. Some said China and India would voraciously suck up supplies and that a lower price will never be seen again….eventually the bubble did burst.

No single entity can be expected to be prophet of morality, economics and corporate conduct. With Kharif arrivals almost at the doorstep...just watch out for the interplay of all these three factors….there is going to be more intrigues during the coming months compared to the soap operas of the evenings.

Published in The Economic Times 20 September, 2010