Most modern jobs have a bit of pointlessness to them from time to time. But the most pointless job I think I ever had was when I worked in the commodity (or derivatives) markets; two years as a trader and two years as a Research and Risk Manager for a commodity fund. As a trader I worked with a group of five technical traders. We held positions forthe long term, using a set of magic equations that at the time seemed to give us a little edge in the markets. From our office on LaSalle Street in Chicago, in the shadow of the pagan goddess Ceres who watches over the Chicago Board of Trade, we traded in about 65 markets worldwide. We traded all day like good Americans and all night in case something interesting happened in Australia. The trading job consisted of checking our market calculations in the morning, then sitting for hours watching screens full of numbers winking brightly every few seconds as they recorded a trade on some exchange somewhere.When I was trading, screen traders like us were becoming common. But the heart of commodity trading was the speculator known as a floor trader. Floor traders were the hard drinking, hard cursing, hard living folks who traded on the physical exchanges in what are called The Pits. The Pit isnt called The Pit for nothing. It was a terrible place; a museum to Darwin in the form of a sort of hole in the floor where every iguana, turtle, finch, and beetle in the Galapagos was dumped every morning to see what would crawl out when the closing bell rang. Hundreds of men (and a couple of women) shout and spray saliva on each other for hours while wildly waving their arms up and down. They are almost nose to nose and it was no wonder that once or twice a year we would hear of exotic epidemics sweeping the pits, like tuberculosis. These people were true speculators, which is as much a lifestyle as an occupation. And the person who said that one can tell a Pit Trader by their two inch foreheads and the scabs on the backs of their hands from where their knuckles drag on the ground was not far wrong (although I of course exclude any traders that you might know personally).If some occasion presses, like having to give a presentation at the daughters What on Earth Does Dad Do For a Living day at school, many commodity speculators can give a good economic reason for why such speculation needs to exist in modern capitalism. It is simply a form of insurance against major future price moves in a commodity. Like it or not, risk mitigation is part of the secret black heart of capitalism. Prices can move, sometimes radically, and hedging a price with commodities or options is an important way that once can bet that the outputs of investments will perform as predicted.Only a couple percent of the trades on any exchange (if that) are done by people who hold the actual physical commodity and are hedging the price. One might think that this should lead to a small market. After all, if this couple percent found a counter party to the hedge, the deal would be done. But hedgers (who themselves are not speculating, note) not only have to find a counter party; they may have to find one very quickly. For while hedging protects against losses, should the price later move to an even better position for them, they will have to set up a new hedge (and roll out of the old one) to protect the new price. The counter parties to these hedges will also want to hedge against other things that might be happening in the economy (like changes in the relative value of money) and they may also want or need to roll out of positions quickly. So in tumble more speculators who are willing to make bets on very small price moves. Even tiny price fluctuations can be profitable (or damaging) if one is dealing with a large amount of money.Now all of this creates market volume and high volume is said to be good for markets because it provides liquidity, which is the same as saying that price moves will (usually) be relatively small and people will (usually) be able to get out of a position quickly. But I say usually because sometimes the price of something will shift dramatically in a very big way all of a sudden. When that happens, the little light on the screen that blinks brightly every second or two stops blinking altogether and simply glows fiercely, boring its way into your soul like your own bad conscience should you happen to be on the wrong side of a trade. Or, if you are on the right side, the light glows like a winning slot machine dumping endless invisible dollars by your feet while you dance around like Tevye in Fiddler on the Roof. A frozen light means that the market is moving too fast for the price to change quickly. All of that nice liquid volume is now stampeding towards some little door as Chinese and European bureaucrats pound on their desks weeping bitter tears about evil speculators. There is very big money to be made (or lost) quickly in this trading and the pointless ninety-nine percent of the time you spend watching the paint dry on the price screen is punctuated by the one percent of your time you spend vomiting into the trash can out of fear and/or joy.Pure greed isnt enough in this business. It takes a certain kind of crazy sociopath to prosper in this lifestyle, because this is real risk. Ironically, everyone knows how risky it is because it is highly regulated. Regulation means that trading is only done is certain registered public markets that have maximum price transparency. If one is trading, say, a bucket of 65 things at once, each position can be marked to market every day and the various losses and gains netted so that one generally know exactly where one is. Regulation does not eliminate volatility (any more than it can eliminate speculators). What regulation does is enable people to enter the market with their eyes open.When I was in The Game, the big investment houses and (to a much lesser extent at that time) banks were also playing with commodities. Risky as derivatives were, they were simply too potentially profitable to pass up altogether. But a trip to the commodities desk at Bear Stearns (Gotta go up and see The Bear today) or a bank was different from a trip to a pure commodity operation like ours.The very first thing you would notice was how people dressed. Commodity firms took their dress cues from the Pit Traders. The big exchanges had strict dress codes that dated from the 19^th century. The only compromise with modernity was that traders no longer had to wear a top hat while trading, but ties and jackets were required. Still, the traders, rugged individualists to a man, flitted as always on the outer edges of the rules. Most looked like they had dressed out of a dumpster. The collared shirt was invariably a ragged and faded polo shirt, un-tucked. The tie, which was never firmly knotted against the neck, was either specifically chosen for its garishness or was a decent business tie so dirty that one suspected it was being used as a Kleenex. The jackets were technically jackets in that they had sleeves and sometimes even lapels, but they appeared in any color or pattern or sometimes all colors and patterns at once. But why not? We are talking about cowboys here. How are cowboys to dress?Commodity traders in the big banks and financial houses dressed like they made money; the old fashioned way, which is to say, like bankers. The conundrum of banks and financial houses was that they wanted the high returns that the speculators got (and we are talking about returns higher than fifty percent a year), but they absolutely did not want people to think they were engaging in risky behavior. So sometimes we would visit traders that we had known that had gotten bank jobs, for the ostensible reason of conferring but actually so we could laugh at them, their suits, clean shaven faces, and neat haircuts.Commodity and derivative speculating as a bank employee was hard in those days, because banks were very unforgiving of the inevitable draw downs; the bad days where a fund might lose five or ten percent of its value due to market volatility even if the positions were going the right way in the long term. Draw downs are as much an occupational hazard for professional market speculators as hangovers are for professional bartenders. But even relatively small draw downs that we would simply laugh at in my shop after work at the Ceres Lounge over cocktails strong enough to stand a spoon up in would at a bank bring in bunches of carrion eating accountants and auditors with non-negotiable offers to participate in future trading decisions. It is a fact that there used to be an inverse correlation between the number of accountants in the operation and the level of speculation and most of the bank or financial house traders that I knew come to a bad end. And worse, not even in the grand blow-out way that we in The Game would ruin ourselves.This is not to say that big banks and financial houses were immune to speculation as such. This was proven in the dot.com bubble, where the updraft of inflated stock prices lifted so many so high. But this was in the normal course of hawking stocks during a period where anyone with an E-Trade account was a financial genius. (Overheard at a restaurant shortly before Christmas, 1997. Two businessmen discussing high finance. Im cleaning up my portfolio before the end of the year; Im selling all my winners and keeping all my losers Oh, Ceres, no. But in that market it probably didnt really matter that much.) One of the things that made the dot.com bubble possible was that people were trading stocks, which in the world of 401Ks were no longer considered especially speculative or risky. Everyone had stock now.But stocks, even during a bubble, are highly regulated, traded in official exchanges, and have prices that are transparent and published in the news. (The Achilles heel of the dot.coms was in the transparency of the underlying financials.) Many may remember in those pre-Sudoku days watching people on the train in the morning with their Wall Streets and pocket calculators counting their un-hatched chickens.This current crisis came, however, because over the counter financial instruments were mostly unregulated. One could not price ones portfolio no matter how many PhDs in science one held from the University of Mumbai. And not only could the professionals not price their own portfolios, but the portfolios carried a double risk. In commodities and stocks, the speculator can know a great deal about the underlying physical asset that forms the basis of the trade. Gold and oil traders know at least something about the relative supply and demand of gold and oil. Stock traders can look at the financials of the companies they are trading. They may not be able to see everything that is there, and it may be that financial reporting regulations need to be tweaked from time to time to keep ahead of the CFOs. But stocks and commodities are tangible things whose relative value can be assessed to some degree outside of their current market price.Moderncomplex and sophisticated financial instruments originally developed just as commodities were as necessary hedging devices. But these new things were opaque at the market level, since there was no regulated market to mark their value. And the underlying assets themselves were hybrids of bits and pieces of other that also could not be reliably priced in the way that companies and commodities are.Now dont get me wrong. Speculators are necessary to a capitalist economy and in a global world where assets can consist of different kinds of risk at the same time. But despite what Wall Street says, this is not the point. As I pointed out above with the holders of physical commodities, those who hedge an underlying asset whose value is known are not speculators. They are, in fact, trying to avoid price speculation. But what the banks and the big trading houses (that in effect became big banks themselves) were doing was speculating, pure and simple. And they were hiding this from the rest of us. I dont think that I am being an old curmudgeon when I say that banks should be about NOT speculating. But this is why people store their money there. We cannot and should not try to eliminate speculation in our economy, but people should know who is speculating and who isnt so they can themselves can choose to speculate or not. Amazingly, Wall Street is STILL trying to get us to believe that the banks were not, in fact, speculating and that all the highly paid scholar boys from the Ivy Leagues who are by definition smarter than the rest of us know that the big speculative market collapse wasnt about speculation at all. The rest of us who are bailing them out right now only imagined it.We should not, and cannot, eliminate speculation. There will always be people who are willing to put a million on a long corn position just as there are people who are willing to put a million on that big frog on the left being the first to jump off the lily pad. But what regulation can and must do is enable us to tell whether our portfolios contain gilt edged securities or a bowl of frogs. This is the very price transparency that economists always assume when they talk about their market theories. It means that the cowboys dress like cowboys and not like John Houseman. Fools should be warned that stock and commodity trading are for professionals only. But anyone (and especially a professional) should recognize the difference between cold hard cash and cold soft amphibians. And thats (all) the regulation we need.