Comment Text:
I strongly SUPPORT the proposed rule on Position Limits for Derivatives, with some relatively minor caveats.
I fear that being merely an intelligent person (I hold a Master's Degree in Computer Science) observing the market leaves me at the disadvantage of not understanding all of the jargon in the proposed rule. Hence, I appreciate your effort to understand my perspectives and fold them into your considerations pertaining to this Rule.
My first concern is that the analysis you presented, beginning with the words "Large concentrated positions in the physical commodity markets can potentially facilitate price distortions" falls short by ignoring a concern that has been repeated to the Commission voluminously. The two issues I see addressed in this paragraph are (1) the capacity of the market to absorb the purchase/sale of such positions in an orderly manner, and (2) the unwarranted appearance of liqudity. (This second issue stretches my brain since in other places you state that a positive good from concentration is the creation of liquidity in small markets.) What you fail to mention is the price distortion that is created by the long-term maintenance of a concentrated position. Perhaps this is only apparent when the concentration is on the short side, but it has become clear to me (as I have watched the silver market for about five years) that the market price of silver would be appreciably higher if there were any serious intent to close out these short positions.
While I do not have any evidence of an attempt to manipulate the price of silver, I find it deeply disturbing that these huge short concentrations were not liquidated when the price fell by 50% in 2008. The facts that these shorts remained through that liquidation opportunity and continued while the price has since tripled is *not* clear evidence of wrongdoing, but it is certainly a big red flag.
In this regard, I highlight a quote in your 14th footnote:
The very large trader by himself may cause important
fluctuations in the market. If he has the necessary resources,
operations influenced by the idea that he has such power are bound
to cause abnormal fluctuations in prices. Whether he is more often
right than wrong and more often successful than unsuccessful, and
whether influenced by a desire to manipulate or not, if he is large
enough he can cause disturbances in the market which impair its
proper functioning and are harmful to producers and consumers.
The fact that the very large trader(s) in silver have not yet caused chaos in the market is good fortune that cannot continue indefinitely. As the price continues to be depressed below the realities of supply and demand, and stockpiles continue to be depleted, the day of reckoning cannot be postponed indefinitely. When demand overruns the large shorts, and buyers require delivery on non-existent silver, the siesmic shift in price will be very harmful to consumers.
My second concern is that the 10%, 2.5% formula in the Rule is not a sufficient response to this aberration in the silver market. In light of my previous concern, I can see that this might be a reasonable first step, but that there should be a clear indication that the limit will become more strict over time, which would allow the large short positions to be liquidated in an orderly manner, but with deliberate haste.
Perhaps if I were better educated in the history of the market and the origin of this formula, I might be able to offer a more specific alternative. In the absence of such personal expertise, I direct your attention to the long trail of analysis that has been done by Ted Butler, and his conclusion that 1500 contracts is a more reasonable limit in silver. I am confident that careful analysis of this and other markets would lead to numbers that would support an alternative formula which could be applied evenly across the various markets.
Again, I emphasize my support of doing at least as much as this proposed rule, and I urge you to continue to improve rather than considering this first step as an adequate conclusion to the matter.
Respectfully submitted,
Gordon Burkett
