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October 10, 2013
Senior Consultant Shaun Ledgerwood Quoted in Businessweek on Subjectivity of Commodity Price Setting

Brattle Principal Shaun Ledgerwood was quoted in an October 10, 2013 Businessweek article that examines the price setting mechanism for commodities and discusses the need for greater transparency in the market.

Unlike prices for stocks, bonds, and currencies that are set by trades on public exchanges, deals for the delivery of commodities are often made in private using benchmark prices determined by industry publications. According to the article, there are at least six price-reporting companies that cover energy and commodity markets, and quotes are based on available bids, offers, and transactions as well as on phone calls and emails to market participants.

Due to the lack of transparency in the commodities trading market and threats of price manipulation, market participants do not have full confidence in benchmark prices. The article points out that in a recent Bloomberg News survey of 85 traders and analysts of commodities, 27 was the average amount of times out of 100 instances that the assessed benchmark price for the main commodity they trade is estimated as unrepresentative of the true level.

“The survey shows there is clearly a concern that others could be using these price-making mechanisms to bias the price up or down depending on their interests,” Dr. Ledgerwood states in the article. He also points out that while published benchmarks provide more transparency, alternatives are lacking.

“From the traders’ perspective,” says Dr. Ledgerwood, “no other mechanism provides as reliable a source of information.”

The article, “Setting Prices by Word of Mouth,” can be viewed on the Businessweek website.