It's the speculators

London is kicking NYC's ass all thanks to DC. How much are you guys spending on the lobbying effort? lol.

Politicians need a Hippocratic Oath!!!

that the bigger the market on a security (and futures are securities) the less violent the price fluctuations because the number of players in it dilute any big movements that any one player's panic or greed might be able to effect (statistics 101, right? The effect of an outlier in a small sample size, yadda yaddda). Here is a simplistic example:

Only 5 people trade a given, you, me, and 3 others. I have a widgets I want to sell and offer it at 10 bucks because I bought it at 9 and want to make a profit. You would buy it if it was 5, and the other 3 would buy it if it was 4, 6, and 7.

Suppose also my transaction was the last one, so the last known price for the widget is known to have been 9.

No one takes it at 10, so I gradually lower my price until I hit 7 and that guy buys it. It is a small market, so I have no option other than either hold it or bite the bullet and lose my 2 bucks.

Now, I just lost more than 20% of my investment, so next time I buy or sell widgets, I'll be nervous. The other 4 will probably have learned of my loss, so they'll be wary as well. If I bought my widget on credit, banks will be nervous too because now I have less money to repay them so I am riskier. All this risk gets priced into the next transaction.

In a bigger market, there is a higher possibility that there would be intermediate price points between 7 and 10, so the fluctuation might not be as violent. With more buyers and sellers, the risk gets diluted.

Notice also, that if I bought the widget in a delivery-only market, I will eventually need to buy another because I use them. Why did I sell, then? Maybe I needed the cash to do something else that was more urgent than my future use of the widget. If I could sell the right to buy the widget in the future (i.e. an option) to guercotti, who has piles of cash but does not need widgets (he is a speculator) I might have been able to come into an agreement whereby sell it at 8.50 and cut my losses.

This is, of course, extremely simplistic because these things are sold in much more complex ways, but it is the basic idea behind the beast.

You can't hedge properly or as well if no one speculates if they can only do so if they take delivery. Additinally, without speculators, people who take delivery would be limited in the ways they could exit their positions if they needed additional liquidity before delivery. An illiquid market is riskier and that would cause prices to rise as well.

Not to mention that the effect would not be to stop speculation, but to move it abroad, like Sorbanes Oxley got IPOs to move to the AIM in the London Stock Exchage.

Having said that, making trading more transparent is a good idea, but very different from stopping speculation.

Additionally, if it institutional investors were not allowed to speculate in commodities, pension funds (read, your retirement) would have nothing to offset their losses from their equity investments.

You can regulate markets, but you can't outright forbid trading. Congress is in a froth because they failed to come up with a responsible energy policy and now need to blame someone.