Washington (Kitco News) --A silver trader said Thursday he is encouraged by the U.S. Commodity Futures Trading Commission's effort to implement a consistent policy for position limits in commodity markets of finite supply and said the COMEX silver position limit should be reduced to 2,000 contracts.

"The accountability limits in COMEX silver are 6,000 contracts (or 30 million ounces), with the delivery month limited to 1,500 contracts (or 7.5 million ounces)," said Mark Epstein, an individual trader at a hearing by the US Commodity Futures Trading Commission on position limits for metals futures contracts. "I believe this is too high."

Epstein said for COMEX Silver, "the position limit should be reduced to 2,000 contracts, with delivery month limited to 1,000 contracts. And, most importantly, exemptions should be granted only to bona fide hedgers," he said.

Epstein said the current open interest in silver is about 114,000 contracts (or 570 million ounces), almost a year's mine production. He said the CFTC's Commitment of Traders and Bank Participation Reports indicated the largest single position is held by a bank on the short side. He said the position's size is about 30,000 contracts (or 150 million ounces. That amount is about 120 million ounces larger than the current accountability limit, he said.

"Presumably, they must have been granted an exemption to the position limits, but this seems wrong to me," said Epstein. "Exemptions should be granted only to bona fide hedgers."

Epstein said his study of the micro-price movement personality of the COMEX silver markets indicates it behaves like no other market. He said the typical available liquidity in the deck is tiny, yet there is an average daily volume in excess of 40,000 contracts.

"The existence of oversized market participants has a chilling effect on market makers, which results in even less liquidity as market makers widen their price to compensate for the risk they are taking," Epstein said in prepared testimony for the CFTC hearing. "Consequently , the large orders wind up setting prices, rather than the proper function of the futures markets to discover prices."

He said the size of the open interest in COMEX silver is "irresponsibly large, given the reality of world inventories and production. " There is also a "significant imbalance between the largest long positions and the largest short positions," he said, with the shorts being heavily concentrated.

"In a physically delivered futures contract for a commodity of finite supply, this also exposes the marketplace to an unnecessary risk of failure-to-deliver," said Epstein. "Such an event could destroy the COMEX silver market."

--By Terry Wooten of Kitco News, twooten@kitco.com