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.The law of averagesdictates that they will hold roughly the same exposures to roughly thesame clients.So, facing only each other, and holding the sameexposures, these big boys of OTC commodity derivative trading havenowhere else to go in hedging their exposure than the actual real futuresexchange itself.What difference does this new view of swap dealers make to thebalance of speculative versus genuinely commercial interest in theNymex crude market? It seems clear that, given the rise of institutionalinvestor interest in commodity derivatives, this speculative element willhave a significant role in reaching the net exposure a given swap dealerhas to bring to Nymex to hedge away.But with the way data on thisNymex market segment has historically been collected and presented bythe CFTC, there is no authorised estimate available of how much swapdealer activity on Nymex relates to hedging exposures due to financialspeculation, as opposed to supposedly more traditional exposure tocommercial hedge counterparties.We could, however, get some sense ofwhat the outer limits of such a scenario would look like, by simplyreversing the CFTC classification of swap dealers from commercial intonon-commercial.And we can do this because, while the CFTC normally121Petromanialimits its reporting split in the standard CoT report to theaforementioned commercial/non-commercial, a couple of academicstudies released under its auspices have recorded a more detailedbreakdown of market participation.Figure 8 recasts the same data for total Nymex WTI open interestdata (shown previously) to demonstrate the split between commercialand non-commercial interest at three different points in time 2000,2004 and 2008.That data comes from a CFTC study released at theend of 2008 (by Büyüksahin, Haigh, Harris, Overdahl and Robe seeSources & Bibliography), which also revealed the subdivisions withinthese two broad classifications at each of these three snapshots ofmarket activity.In our figure we pull out various sub-divisions asidentified in this data into their own category, so that we can bothappreciate their relative importance to the overall growth of openinterest on the futures exchange through this period 2000-2008, andalso construct our own new index of speculative potential on theNymex exchange.Under the new data split, we identify as specifictrading groups the swap dealers themselves, the hedge funds (orMMTs), the other parties classed alongside MMTs in the CFTC non-commercial category as other non-commercial , and lastly an unquestionably commercial category, which is simply the commercial category according to the CFTC distinction minus theswap dealers.122The Financialisation of OilTotal curve 2000Total curve 2000Unquestionablycommercial36%43%SwapOther non-commercialHedge6%15%Total curve 2004Total curve 2004Unquestionably31%commercial36%SwapOther non-commercialHedge21%12%Total curve 2008Total curve 200815%Unquestionablycommercial35%SwapOther non-27%commercialHedge23%123Petromania30000002500000Unquestionablycommercial2000000Other non-commercial1500000Hedge1000000Swap500000Total curve 2000 Total curve 2004 Total curve 2008Figure 8: Nymex oil market growth with more detailed trader definition[Source: CFTC (Büyüksahin, Haigh, Harris, Overdahl & Robe, 2008)]The first three categories added together give us our new definition ofpotential speculative activity on the market, as opposed to theunquestionably commercial activity.As can be seen, having reclassifiedthe swap dealers into the potentially speculative category alongside theCFTC non-commercial traders, we can see that in all three years thisnew grouping dominates the market, but its dominance grows markedlyover time.From accounting for 57% of open interest in 2000, this potentially speculative agglomeration accounts for 69% by 2004,and an incredible 85% by 2008.And of course, this really is incredible.With this example we are not seeking to say that by 2008 this actuallywas the proportion of open interest originating from financialspeculation.We are, rather, saying that unfortunately this answer tothat question is as valid as the answer given by looking at the datathrough the traditional lens of the CFTC CoT classifications.The truthundoubtedly lies between these two extremes the problem is, no oneknew where.124Open interest (conracts)The Financialisation of OilNevertheless we can still draw other conclusions from this data.Whilethe whole focus of the preceding passage has been on swap dealers,their actual share of the market is roughly constant at around 36%through these three historical samples.Of course, in absolute terms thevolume this same percentage accounts for has grown massively, as wecan see from the presentation of the same data in Figure 8.From under250,000 contracts in 2000 (the actual exact figure is 208,638), itincreased to around one million contracts in 2008 (the actual figure is947,951).Nevertheless this realisation serves as an importantcorrective.The whole point about the swap dealer loophole is that itrepresents a significant additive to other speculative players alreadyclearly acknowledged as such in the market, rather than replacing theseplayers as the sole concern.Hedge funds which in this data will meanthose hedge funds acting directly for themselves in Nymex, rather thanrelying on floor brokers or swap dealers display striking growth inmarket participation, from 6% to 12% to 23% for 2000, 2004, and2008 respectively
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