Information Is Power

Last Updated: 30 January 2023

Chris Cook’s fascinating blog on the oil market pricing structures that underlie energy ETFs raises several broader questions.

His central tenet – that exchange-traded energy contracts, upon which ETF pricing is based, are merely the tail of a very large, invisible dog (the market for deliveries of physical oil cargoes based on the BFOE benchmark) – goes to the heart of what are crucial issues for any ETF investor. What am I tracking? Is this a representative index? What are the costs of tracking it? And is it priced fairly?

The difference between trading on- and off-exchange is a crucial one for investors to consider. On-exchange trading may be more transparent and off-exchange more profitable for the participants, but it’s not necessarily a question of on-exchange equals good, off-exchange bad. After all, there may be valid reasons why trading is taking place on a bilateral basis and not through a central hub. I’ve seen at first hand in emerging market countries how poor regulation, inadequate exchange infrastructure or greedy government officials can send the “real” market underground.

Pricing is a key issue, particularly if the bulk of transactions are conducted away from a single exchange platform. How accurate are the prices that constitute an index if that is the market structure? Are index providers getting a true picture of what is going on?  

Then there’s the acute problem of “too big to fail”, perhaps the biggest heist ever conducted by one group of economic actors at the expense of the rest of the public. If market participants operate under the assumption that they will be bailed out if things go wrong, they won’t care about the quality of their counterparties. So should over-the-counter trading be banned completely and all buying and selling forced onto exchanges, where rules can determine collateral and margining requirements, and sanctions for misbehaviour?

These questions are no doubt vexing politicians and regulators worldwide at this very moment as they grapple with the gigantic off-exchange derivatives market and how to avoid the further dumping of costs onto taxpayers if financial institutions get into more trouble. If today’s Institutional Risk Analyst is anything to go by – Christopher Whalen reports that Timothy Geithner had a foul-mouthed exchange with other US regulators in a US Treasury conference room last week – the powers that be are far from agreement on any coherent policy.

I don’t know what the solution is, and it may take years to reach a consensus on a new global financial market trading infrastructure. But it is vital that ETF investors follow the discussions that are going on. ETFs, as passive, index-tracking investment vehicles, require dependable, accurate investment benchmarks to track. It’s becoming increasingly clear that liquidity and pricing transparency are better in some parts of the market than others.

After all, information is power and power equals money, especially if one group of market participants has preferential access to market information.


  • Hello, my name is Luke Handt; I am a successful Bitcoin trader, financial analyst, and researcher. I have been studying the market trends for the conventional stock exchange system globally since I was in college.

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