M.I.T.’s John Parsons challenges the logic of an SEC staff memo downplaying the market-distorting potential of copper exchange-traded funds. The memo is “a testament to how America’s financial regulators too often fail in their duty to protect the sound functioning of US financial markets,” Parsons writes on his bettingthebusiness blog. He cites the careful, detailed critiques filed by industry players and by Americans for Financial Reform. These, he says, “are well worth reading, and thoroughly impugn the soundness of the Staff’s conclusions.”

“What alarms me most is the narrow scope of the questions that the Staff posed, even had they bothered to do a thorough analysis of those questions,” Parsons writes.  “A proper regulator needs to assure that the market functions well. There are any number of ways in which its operation can be disrupted. We have a long, long history of commodity markets in the US, and that means we have a long history with market manipulation and other price distortions. We have a long, long history with financial markets in the US, and that means we have many experiences with asset bubbles, especially in the recent past with the dotcom and housing bubbles, as well as the oil price bubble. Neither of the two empirical tests the SEC Staff examined touches in any way on the issues one would want to examine in order to assure the sound functioning of the copper market and the healthy contribution that financial trading could make to the market. “