Front Running Against Humanity in the Oil Markets

Stephen Zarlenga

[Reprinted from GroundSwell, September-October 2008]

"Front-Running" is an insiders term for an often illegal, always immoral practice in commodity and other markets. Here's what happens:
A broker holding a client's order to buy at a certain price, instead buys for himself just in front of it. The clients order isn't filled and the broker has an unfair advantage over other traders because he controls the client's order which will buy the position back from him and protect his trade from a loss.

The client loses the opportunity to gain, where his order is never filled if the market moves away from his order point. If some participants can trade with little or no risk, over time everyone else is hurt.

Because Exchange Members' margin requirements are only about 1%, the front running brokers have a possibility of great gain quickly with almost no risk of loss.

Why is this important to public policy?

"Front running" is one way to view what criminal Enron executives did to California. They had the client's non- cancellable, inelastic orders to buy electricity and they grabbed the available supply in front of that, restricted the delivery process and extorted higher prices; blaming price rises on market forces.

Enron was bad enough, and Sarbanes-Oxley was passed to hold corporate officers criminally liable -- a good law as judged by the corporate types screaming for its repeal. But apparently it didn't go far enough as judged by the present bold attack against humanity taking place.

The manipulation of energy markets has widened from cheating the people of California, to a deadly attack on all humanity. That's what allowing speculation in oil futures is doing today. These markets aren't providing price discovery as apologists like to claim. They've driven the price of oil to destructive levels. The damage has already been immense.

We've seen the devastating effects oil prices have had on airlines; trucking; food delivery and production; on average families trying to keep up with living costs; on restaurants and hotels Americans can no longer afford. Add your examples. It's the speculation and hoarding that does it. Exxon couldn't grab $12 billion record 2nd quarter profits if their costs of obtaining oil were rising.

And so I put aside an outline for this paper when it appeared Congress would do its job to rescue the world economy from this pernicious vandalism, by limiting speculation in oil futures to a few contracts per account.

That's all it would take to stop the nonsense.

There's no reason to allow speculators to position themselves between the world's limited oil supplies, and those who have to use that oil to keep the world economy functioning. Such speculation leads directly to hardship, starvation, death and warfare. Congress will finally fulfill its responsibility to act, I thought, but the measure failed in the Senate with 50 for, 43 against, and 7 not voting!

Why didn't Congress act?

If this scenario is so clear and harsh, how could the Senate refuse to act? Are they a gang of demons? No, but something potentially worse; we're confronted with a bad idea that many people believe in -- the sanctity of markets!

The vote exposes a faulty methodology - an ideology based on false axioms; a false view of markets that's been strongly promoted, not questioned; with its negative effects not understood; that view gives markets a sacred character:

Don?t try to legislate against what the market does; market forces will crush your laws. (Its omnipotent!)

Don't try to instruct market behavior; it has inputs from millions of participants and knows more than your regulators ever could! (Its Omniscient.)

Do the right things and the market will reward you; misbehave and you will be punished! (Its benevolent.)

Well, omnipotence, omniscience and benevolence are attributes of a god, and Senators don't often fight with god!

What's sorely missing from these beliefs and assumptions is evidence!

Where's the evidence that removing regulation from the airline industry had good effects?

Where's the evidence that removing FCC restrictions on media ownership had good effects?

Where's the evidence that removing government regulation from any industry has had good effects?

Of course it's worse than that. It goes beyond a lack of evidence because there's plenty of evidence to the contrary! Holding those beliefs requires ignoring loads of evidence: ignoring the damage done to the airlines by deregulation; the damage done by media concentration; the continuing damage done to America's middle class; ignoring: (insert your favorite)

How can proponents of unregulated markets justify ignoring the facts? Its crazy, but it's also a necessary part of their false methodology which loves theory but avoids experience -- the facts. One of their leading lights, economist Ludwig Von Mises, carries it to extreme levels actually claiming that facts cannot disprove his theories! So we are dealing with momentous errors of judgment and methodology. Though these men are in the U.S. Senate, they are thinking like scared children. But such errors belong in children's sand boxes, not our nation's halls of power.

This battle over methodology is an old fight. We even see it in our nation's beginnings. Ben Franklin's 1729 essay, The Nature and Necessity of a Paper Currency gave the correct methodology when he summarized the ideas used to help Pennsylvania set up its paper money system in 1723 rescuing her from a prolonged usury crisis. Franklin told the world:

Experience, more prevalent than all the logic in the world has fully convinced us all that paper money has been of the greatest benefit to the country.

Maybe as some Senators voted against stopping oil speculation, perhaps a more human inner voice rebelled against what they did. Was that voice stifled by an unholy combination of greed & selfishness, assuaged by their comforting though unsupported belief in the utility of unbridled selfishness and greed? The false notion that selfishness works?

The Senators are not demonic, but their ideology, summarized as Market worship, which ignores the human part of the resulting tragedies, certainly is.