Markets and casinos shouldn't be the same thing

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Here’s a statement that some might be surprised at me making: Markets work. As a way of matching buyers and sellers, or capital with investment opportunities, markets are an effective and efficient method, better than anything else humanity has managed to devise thus far. There are, however, two caveats.

The first is that there is no such thing as a completely ‘free’ market. All markets have rules by which they operate. One of the reasons for that is that the assumptions used by theoretical economists when considering markets – that all participants have equal power and that all have perfect knowledge of what is happening – are blatantly inaccurate. Markets can only work effectively if those (and other defects) are corrected, so we have rules which must be followed. There will always be disagreements about what those rules should be, but the key issues are who makes the rules and in whose interests they operate. Those arguing for completely ‘free’ markets are invariably arguing for markets which are slanted in favour of those with the most power and the most knowledge. No surprise there.

The second caveat is that a real market is about those basics mentioned above, such as matching real buyers with real sellers, exchanging real things. Yet, when it comes to the world’s financial markets, most trading is nothing to do with that; it is, instead about gambling and speculation, with people trying to leverage large trades for very small profit margins on a day-by-day or even hour-by-hour basis. And in some cases, what is being ‘traded’ (i.e. being bet on) isn’t even something with any real existence beyond acting as a gambling chip. Crypto currency is a case in point. It has no real ‘value’ and its price fluctuates wildly. As a means of winning (or losing) a fortune in  short time, it’s ideal, but its value as any sort of ‘investment’ is doubtful, to say the least. Yet, lured by the improbable apparent ‘value’ of these ethereal ‘assets’, some governments are trying to pretend that they are real enough to be treated as investments by the man or woman in the street.

It's perhaps obvious why Trump would wish to do this – he has after all issued his own bit of crypto, from which he’s made a lot of money at the expense of his cult followers. It’s less obvious why the UK Chancellor would be considering anything similar. There’s nothing wrong with seeking to regulate crypto currencies as such (although the whole point of some of them is to set them up in such a way that they are very difficult to regulate effectively, not least in order to facilitate tax evasion), just as other types of gambling are regulated, including for the safety and protection of the punters. Seeking to regulate them as though they were ‘investments’, however (which is what she seems to have in mind) is dangerous, and risks creating the impression that an inherently risky proposition has somehow been rendered safe. It’s a bad message to be giving out.

All power to the speculators

Tweet I really don’t know where to start with the latest post from Lib Dem AM Peter Black.  One of the world’s leading speculators (described in the blog as ‘a world leading expert on currency’ – I thought it was tongue in cheek, but apparently it’s intended to be taken seriously) has said, in effect, that if the intransigence of the unionist parties in the UK forces an independent Scotland to create a new currency, it will leave Scotland open to attack by speculators who will see the new currency as weak and therefore an opportunity to destabilise a whole country in the interests of making a profit.

Well, of course, any small country with its own currency is open to the same sort of unprincipled attack at any time; it doesn’t need to be a new country.  And the “financial meltdown that swept through the Eurozone” didn’t happen by accident either; much of that was the result of speculation as well.  (Yes, of course the countries concerned had a few problems of their own making, but it only became a wider crisis because of the actions of the speculators).  Any country and any currency are open to such attack at any time, regardless of size; it’s not just a problem for an independent Scotland.

The speculators need to have a fear to play on of course – otherwise they don’t all act in the same direction, and their gambles cancel each other out.  But the story here isn’t really about Scotland at all – it’s about the power that our political leaders have ceded to the casinos which pretend to be markets.

And the political answer that we need isn’t – or shouldn’t be – “you can’t do that because the speculators will ruin you if you do”, which seems to be the conclusion of the blog post.  What we need is co-ordinated action to take speculation and gambling out of the equation; we need to curb their power not bend down before it.

Gamblers with systems

Tweet The massive failure and subsequent rescue of a Wall Street trader last week underlines the extent to which the trading floors of stock exchanges have been transformed from places which allocate capital to companies to casinos. 

The company itself blamed an ‘IT glitch’ for automatically placing  huge volumes of trades which sent the Wall Street share prices of 148 companies into a state of wild fluctuation.  Details of the ‘glitch’ have yet to be revealed, but as an ex computer programmer, ‘IT Glitch’ is not a term I can relate to. 

On this occasion, the computers may have done some silly things, but they were only acting on the instructions of their programmers – the glitch is ultimately a human one.  The human telling the computer what to do got it wrong – and the result of what was probably a very small error was the collapse of a company which lost £283 million in 45 minutes.

The response of the company’s CEO was remarkably sanguine – “Technology breaks”, he said.  It’s the reaction of a gambler, and like most gamblers, he and his company are unlikely to change their ways.

The fact that so much money can be won or lost in such a short period should worry us more than it appears to do in practice.  Much of the ‘trading’ on world stock exchanges is now automated.  Computers running sophisticated algorithms decide when to buy and when to sell; trading the same stocks over and over, thousands of times a minute, trying to leverage tiny differences in price by sheer volume and frequency of trading.  

Different computers using different algorithms compete with each other in tiny fractions of a second.  It’s even got to the point where the computer centres are being moved to be nearer to the exchanges – the time lost by a message travelling at the speed of light over a distance of just a few miles can put them at a disadvantage in this particular casino.

Whether the stocks and shares being bought and sold between the varying computer programs actually exist or not is an interesting but largely irrelevant question from the perspective of those involved.  All of this has nothing to do with the business of ensuring that companies employing real people to produce real goods in the real world have access to the capital they need, nor with investing in pension and insurance funds. 

It’s a casino, pure and simple.  And if there’s one thing worse than a compulsive gambler, it’s a gambler who has a ‘system’ with which he thinks he can break the casino.

With the exception of the shareholders in one particular company, who have seen the value of their shareholding plummet, we’ve got away with it this time.  There’s no guarantee that the next ‘glitch’ won’t have much more impact on us.  The best way of doing that is to put these people in real casinos, and leave them only their own money to play with.