Commodities Traders: 'The Secret Club That Runs That World'

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David Greene talks to reporter Kate Kelly about her new book, The Secret Club that Runs the World: Inside the Fraternity of Commodity Traders. The commodities market is a high-stakes place to invest.

DAVID GREENE, HOST:

OK, we're going to get a crash course this morning on the commodities market. This is where everything from grain, to coffee, to crude oil is bought and sold. It's a complex and very high-stakes place to invest. And it's the subject of a new book by Kate Kelly called "The Secret Club That Runs The World." We began our conversation with Kelly by playing a scene from the 1983 Eddie Murphy comedy "Trading Places" where the Duke brothers explain the business.

(SOUNDBITE OF FILM, "TRADING PLACES")

RALPH BELLAMY: (As Randolph Duke) They place their orders with us, and we buy or sell their gold for them.

DON AMECHE: (As Mortimer Duke) Tell them the good part.

BELLAMY: (As Randolph Duke) The good part, William, is that no matter whether our clients make money or lose money, Duke and Duke get the commissions.

EDDIE MURPHY: (As Billy Ray Valentine) Sounds to me like you guys are a couple of bookies.

GREENE: So Eddie Murphy's character calls the Duke brothers bookies. I mean, how accurate is that?

KATE KELLY: (Laughing) Well, first of all, I have to say that film clip does probably a better job of describing the commodity trading business than I could, in simple terms. And I do think the business has changed quite a bit since the 1980s. That was really sort of the heyday of the floor-based commodity trading model. But sure, there are still middlemen who make a good deal of money standing in the middle of these trades in various ways, or also speculating on their own behalves, rather than on behalf of a customer.

GREENE: When you say speculating on their own behalf, that sounds like much of what you talk about in the book. I mean, give me the thumbnail for how that works.

KELLY: So speculating, of course, is just making a guess or a bet as to what direction something is going to go in - whether you're at the horse race track or, in this case, if you're looking at gold or maybe a better example would be crude oil. Now, historically, regulators and regular folks like you and me have drawn a distinction between the speculators who are just sort of making a directional guess or bet on where the market will go and the so-called hedgers. Hedgers are people that are exposed to the price of physical oil, maybe because they drill it for a living. And they are trying to hedge their exposure, perhaps to falling prices, which are going to help hurt their core business. And they're trying to do that by using these commodity trades that are done on sort of a commodity equivalent of the stock market.

GREENE: If we look at how this sort of whole business has gone from the '80s to the present day, I mean, the picture that you paint in the book is not just of people who are sort of saying I want to hedge my bet here and make sure I don't get hurt. These are people who are using the commodities market to make unbelievable sums of money. What's happened?

KELLY: Absolutely. So my theory is that there was essentially a commodities bobble in the 2000s. Part of the reasons for that were fears about scarcity. For example, people thought that we were going to run out of oil. So that meant that the cost of the oil we did have was going higher. But the other thing happening was, people were getting into commodities as a speculative bet, as its own business.

GREENE: I think back to the summer of 2008, when the price for a barrel of oil spiked. Gas prices were going up, and lawmakers actually started blaming these speculators.

KELLY: Absolutely. So we didn't realize it, but we were in the very early stages of the financial crisis. But back in, say, June of 2008, prices for gas at the pump, in a lot of cases in the U.S., were at about $4. Consumers were outraged. And the thinking was the amount of speculators in the market is too much, and the sheer size and population of this market is, on its own, driving prices up.

GREENE: You know, I could hear people listening to this conversation, reading your book - they could be hearing, my God, there are very rich people doing this for fun and, you know, their fun might change the price of gas for me at the pump.

KELLY: Well, here's the thing, David. To some degree, at least, speculators are helping markets be more efficient. Now, by the same token, if people are taking overly large risks and potentially risking the system, those are things that obviously need to be examined. And the Commodity Futures and Trading Commissions, the CFTC, has been very active in this regard. They've tried several times to impose position limits, which was something they were asked to do as part of Dodd-Frank in 2010. And I think part of the reason for the controversy is there is quite a bit of dispute as to whether speculation is healthy or not for the markets. I would argue that speculators do end up moving markets. And I think there is some wisdom to position limits because if you put a sort of ceiling on the size of a commodity trade that any individual or any company can make, you might mitigate the risk to the system of huge violent moves up and down that would hurt consumers, that would hurt those sort of hedgers and basic users of commodities that really the commodity market should be there to help protect.

GREENE: Kate Kelly is the author of "The Secret Club That Runs The World." She is also a reporter for CNBC. Kate, thanks very much.

KELLY: Thank you so much.

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