June 4 (Bloomberg) -- Unprecedented growth in electronic and worldwide trading may be overwhelming commodities markets and raising prices, said Walter Lukken, the acting head of the U.S. commodity trading watchdog.

Lukken, the acting Commodity Futures Trading Commission chairman, said he believes prices aren't being systematically driven up by manipulation, and that the commission is looking into whether prices are rising because of a massive influx of legal trading.

Lukken, Commissioner Bart Chilton and commissioner nominee Scott O'Malia appeared today before the Senate Agriculture Committee to argue for Senate confirmation.

``What's being talked about is more money coming into the markets maybe overwhelming the structure of these markets,'' Lukken told the committee.

The commission faces congressional scrutiny over record commodities prices and yesterday announced new requirements that investors and index funds disclose more information about their holdings in agricultural markets. Last week the commission said it would investigate potential manipulation of oil markets.

``The tail doesn't wag the dog,'' William Adams, a managing director at JKV Global in Chicago, said in an interview. ``You've got a weak dollar and higher demand so there is really only one direction the price can go.''

The commission regulates markets including silver and soybeans and derivatives linked to stock indexes and bonds. The prices of gold, copper, corn, oil and wheat have risen to records. Gasoline at the pump has reached an all-time high, and the government forecasts an increase for U.S. food costs that will be the biggest since 1989.

`Worldwide Implications'

Senator Richard Lugar said the work the commission is doing has ``worldwide implications,'' adding that energy costs could ``cause a catastrophe in our own economy.'' The Indiana Republican questioned if the commission had the authority to ensure the stability of commodity markets.

``A lot of money is flowing into these markets, potentially creating a bubble,'' Lukken said. ``We don't have the regulatory tools needed to spot that sort of situation.''

Chilton and Lukken both said that the international nature of trading, the increase in the number of traders and amount of money being traded creates new challenges for the commission.

``The economy is a lot larger than it was,'' Adams, the analyst, said. As a result, there is more demand for goods and there is more trading.

Potential Decline

Over the long haul, the dual effect of speculators, who are looking for better returns, and hedgers, who are seeking to limit risk, ``is not sustainable'' because demand will fall, Adams said.

The number of traders involved in global oil markets has risen as investors seek higher returns than they can get from stocks and bonds, data from the New York Mercantile Exchange showed. Open interest in Nymex crude futures, or the number of outstanding contracts, jumped 77 percent in the past three years to 1.35 million contracts.

The commission is attempting to exchange information with overseas exchanges about trading activities that affect prices. It also is focusing on the impact that large institutional investors who buy and hold commodities have on prices.

The commission is drafting a proposal to require more detailed information from index traders and swaps dealers in the futures markets. It also may reclassify these traders so that it can gain more information about their activities.

Commercial Investors

The witnesses said that commercial investors account for 30 percent of all commodities buys.

Commercial traders, including oil producers and refiners, use the market to hedge their business, while non-commercial traders include financial speculators and hedge funds. The third category is for non-reportable traders, whose positions are too small to consider.

``It's hard to imagine that you have this group of 30 percent of investors and somehow they don't have their thumb on the scale,'' Chilton said. ``We have to look at things in a completely different way.''

Chilton said that more transparency and more investigation by the commission is critical to gaining information to oversee markets.

Senators at the hearing, while broadly concerned about the rising commodities prices, voiced no objections to confirming the nominees. The full Senate will have to confirm the nominees, assuming the committee approves them.

Lukken has been a commissioner since 2002, and was named the acting chairman in June 2007. He was formerly counsel for the Senate Agriculture Committee.

Chilton is a Democrat and has been a commissioner since last year. He was a vice president at Bion Environmental Technologies Inc., which sells products to treat animal waste, since 2001.

Scott O'Malia was a staffer on the Senate Appropriations Committee under Senator Pete Domenici, a New Mexico Republican.

Chilton would be nominated through April 2013 and O'Malia would complete a five-year term ending in April 2012.

To contact the reporter on this story: Daniel Whitten in Washington at dwhitten2@bloomberg.net

Last Updated: June 4, 2008 16:04 EDT