Speculation
Financial market participants |
---|
Organisations |
Terms |
Part of a series on |
Capitalism |
---|
In
Many speculators pay little attention to the
Speculators play one of four primary roles in financial markets, along with hedgers, who engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, and investors who seek profit through long-term ownership of an instrument's underlying attributes.
History
With the appearance of the
Speculation vs. investment
The view of what distinguishes
According to Benjamin Graham in The Intelligent Investor, the prototypical defensive investor is "one interested chiefly in safety plus freedom from bother". He adds that "some speculation is necessary and unavoidable, for, in many common-stock situations, there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone." Thus, many long-term investors, even those who buy and hold for decades, may be classified as speculators, excepting only the rare few who are primarily motivated by income or safety of principal and not eventually selling at a profit.[6]
Economic benefits
Sustainable consumption level
Nicholas Kaldor[7] has long argued for the price-stabilizing role of speculators, who tend to even out "price-fluctuations due to changes in the conditions of demand or supply", by possessing "better than average foresight". This view was later echoed by the speculator Victor Niederhoffer, in "The Speculator as Hero",[8] who describes the benefits of speculation:
Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.
Another service provided by speculators to a market is that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier or even possible for others to offset risk, including those who may be classified as hedgers and arbitrageurs.
Market liquidity and efficiency
If any market, such as
By contrast, a commodity speculator may profit from the difference in the spread and, in competition with other speculators, reduce the spread. Some schools of thought argue that speculators increase the liquidity in a market, and therefore promote an efficient market.[9] This efficiency is difficult to achieve without speculators. Speculators take information and speculate on how it affects prices, producers and consumers, who may want to hedge their risks, needing counterparties if they could find each other without markets it certainly would happen as it would be cheaper. A very beneficial by-product of speculation for the economy is price discovery.
On the other hand, as more speculators participate in a market, underlying real demand and supply can diminish compared to trading volume, and prices may become distorted.[9]
Bearing risks
Speculators perform a risk-bearing role that can be beneficial to society. For example, a farmer might consider planting corn on unused
Finding environmental and other risks
Speculative hedge funds that do fundamental analysis "are far more likely than other investors to try to identify a firm's off-balance-sheet exposures" including "environmental or social liabilities present in a market or company but not explicitly accounted for in traditional numeric valuation or mainstream investor analysis". Hence, they make the prices better reflect the true quality of operation of the firms.[10]
Shorting
Shorting may act as a "canary in a coal mine" to stop unsustainable practices earlier and thus reduce damages and form market bubbles.[10]
Economic disadvantages
Winner's curse
Auctions are a method of squeezing out speculators from a transaction, but they may have their own
Economic bubbles
Speculation is often associated with
In 1936,
It is controversial whether the presence of speculators increases or decreases short-term volatility in a market. Their provision of capital and information may help stabilize prices closer to their true values. On the other hand, crowd behavior and positive feedback loops in market participants may also increase volatility.
Government responses and regulation
The economic disadvantages of speculation have resulted in a number of attempts over the years to introduce regulations and restrictions to try to limit or reduce the impact of speculators. States often enact such
The Soviet Union regarded any form of private trade with the intent of gaining profit as speculation (Russian: спекуляция) and a criminal offense and punished speculators accordingly with fines, imprisonment, confiscation and/or corrective labor. Speculation was specifically defined in article 154 of the Penal Code of the USSR.[19]
Food security
Some nations have moved to limit foreign ownership of
In 1935, the
Regulations
In the
Another part of the Dodd-Frank Act established the
Proposals
Proposals made in the past to try to limit speculation – but never enacted – included:
- The Tobin tax is a tax intended to reduce short-term currency speculation, ostensibly to stabilize foreign exchange.
- In May 2008, German leaders planned to propose a worldwide ban on oil trading by speculators, blaming the 2008 oil price rises on manipulation by hedge funds.[25]
- On 3 December 2009, Representative Peter DeFazio, who blamed "reckless speculation" for the 2008 financial crisis, proposed the introduction of a financial transaction tax, which would have specifically targeted speculators by taxing financial-market securities transactions.
See also
- Adventurer
- Behavioral finance
- Black Wednesday
- Bull (stock market speculator)
- Carbon credits
- Currency crisis
- Currency transaction tax
- Day trading
- DeFazio financial transaction tax
- Domain name speculation
- Equity (finance)
- European crime
- Fictitious capital
- Financial market
- Financial regulatory reform
- Flipping
- Food speculation
- George Soros
- Jesse Lauriston Livermore
- Seasonal traders
- Short selling
- Slippage (finance)
- Spahn tax
- Speculative attack
- Stock market bubble
- Stock trader
- Tobin tax
- Tulip mania
- Volcker Rule
References
- ISSN 0261-5606.
- ^ Stäheli 2013, p. 4.
- S2CID 154097642.
- ^ "CFTC Glossary: A guide to the language of the futures industry". cftc.gov. Commodity Futures Trading Commission. Archived from the original on 18 August 2012. Retrieved 28 August 2012.
- ^ "Staff Report on Commodity Swap Dealers & Index Traders with Commission Recommendations" (PDF). U.S. Commodity Futures Trading Commission. 2008. Retrieved 27 August 2012.
- ISBN 0-06-055566-1.
- ^ Nicholas Kaldor, 1960. Essays on Economic Stability and Growth. Illinois: The Free Press of Glencoe.
- ^ Victor Niederhoffer, The Wall Street Journal, 10 February 1989 Daily Speculations
- ^ a b http://chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_1_derivatives_overview.pdf [bare URL PDF]
- ^ a b Unlikely heroes - Can hedge funds save the world? One pundit thinks so, The Economist, 16 February 2010
- S2CID 156163200.
- ^ ISBN 978-1432954772.
- ^ Lei, Noussair & Plott 2001, p. 831: "In a setting in which speculation is not possible, bubbles and crashes are observed. The results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation, but rather by behavior that itself exhibits elements of irrationality."
- ISBN 9780792377702.
- ^ a b Shiller, Robert J. (23 July 2012). "Bubbles without Markets". Retrieved 29 August 2012.
- S2CID 154819558.
- ^ Dr. Stephen Spratt of Intelligence Capital (September 2006). "A Sterling Solution". Stamp Out Poverty report. Stamp Out Poverty Campaign. p. 15. Retrieved 2 January 2010.
- JSTOR 4478643.
- ^ "Статья 154. Спекуляция ЗАКОН РСФСР от 27-10-60 ОБ УТВЕРЖДЕНИИ УГОЛОВНОГО КОДЕКСА РСФСР (вместе с УГОЛОВНЫМ КОДЕКСОМ РСФСР)". zakonbase.ru. Retrieved 2020-05-02.
- ^ Compare: Valente, Marcela. "Curbing foreign ownership of farmland." IPS, 22 May 2011. "The governments of Argentina, Brazil and Uruguay are drafting laws to curb acquisition by foreigners of extensive tracts of their fertile agricultural land. [...] China, Egypt, Japan, South Korea, Saudi Arabia, India, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates are all buying or leasing fertile land in other countries where food is not always abundant, the Grain report says.
The study says Cambodia, which receives aid from the World Food Programme, has leased rice fields to Qatar and Kuwait, while Uganda has granted concessions on its wheat and maize fields to Egypt, and interested parties from Saudi Arabia and the United Arab Emirates are making approaches to the Philippines." - ^ Frida Youssef (October 2000). "Integrated report on Commodity Exchanges And Forward Market Commission (FMC)". FMC. Archived from the original on 2012-03-03. Retrieved 2012-09-05.
- ^ "Speculative Limits". U.S. Commodity Futures Trading Commission. Retrieved 21 August 2012.
- ^ "CFTC Approves Notice of Proposed Rulemaking Regarding Regulations on Aggregation for Position Limits for Futures and Swaps". U.S. Commodity Futures Trading Commission. Retrieved 21 August 2012.
- ^ David Cho and Binyamin Appelbaum (22 January 2010). "Obama's 'Volcker Rule' shifts power away from Geithner". The Washington Post. Retrieved 13 February 2010.
- ^ Evans-Pritchard, Ambrose (26 May 2008). "Germany in call for ban on oil speculation". The Daily Telegraph. Archived from the original on 28 May 2008. Retrieved 28 May 2008.
Books
- Covel, Michael. The Complete Turtle Trader. ISBN 9780061241703
- Douglas, Mark. The Disciplined Trader. New York Institute of Finance, 1990. ISBN 0-13-215757-8
- ISBN 0-285-63095-4.
- ISBN 9780060598990
- Lefèvre, Edwin. Reminiscences of a Stock Operator John Wiley & Sons Inc., 2005 (1st print 1923) ISBN 0471678767
- Neill, Humphrey B. The Art of Contrary Thinking Caxton Press 1954.
- Niederhoffer, Victor Practical Speculation John Wiley & Sons Inc., 2005 ISBN 0-471-67774-4
- Sobel, Robert The Money Manias: The Eras of Great Speculation in America, 1770-1970 Beard Books 1973 ISBN 1-58798-028-2
- Patterson, Scott The Quants, How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it Crown Business, 2010 ISBN 9780307453372
- Schwartz, Martin "Buzzy". Pit Bull: Lessons from Wall Street's Champion Trader HarperCollins, 2007 ISBN 9780061844638
- Schwager, Jack D. Trading with the Market Wizards: The Complete Market Wizards Series John Wiley & Sons 2013 ISBN 9781118582978
- Tharp, Van K. Definitive Guide to Position Sizing International Institute of Trading Mastery, 2008. ISBN 0935219099
Further reading
- Lei, Vivian; Noussair, Charles N.; Plott, Charles R. (2001). "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality" (PDF). JSTOR 2692246.
- Stäheli, Urs (2013). Spectacular Speculation: Thrills, the Economy, and Popular Discourse. Stanford, CA: ISBN 978-0-804-77131-3.
- Stuart, Banner (2017). Speculation: A History of the Fine Line between Gambling and Investing. Oxford University Press. ISBN 978-0190623043.
- Blaakman, Michael A. (2023). Speculation Nation: Land Mania in the Revolutionary American Republic. University of Pennsylvania Press. ISBN 978-1-5128-2447-6.
External links
- Hidden Collective Factors in Speculative Trading
- Food Commodities Speculation and Food Price Crises
- Understanding Derivatives: Markets and Infrastructure Federal Reserve Bank of Chicago, Financial Markets Group