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Can you 100% identify who is a speculator and who isnt?

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$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Wed Jul 29th, 2009 at 05:19:24 AM EST
[ Parent ]
That's the wrong question. The fact that the markets make no distinction between speculation and investment is part of the problem.

And yes, buying and holding would slow down the market. A two to four week period would be about right, as a random guess, to eliminate predatory shorting, exploratory non-trades and pumping and dumping.

If traders don't care enough about the companies whose shares they trade to keep them for that long, they can always go find something useful to do.

As for computers and speedy trading - just because something can be done, doesn't mean it should be done. No one has a problem with the illegality of using a botnet to trawl for credit card numbers. And yet for some reason anything that happens on a stock market is supposed to be immune from legal oversight - why, exactly?

At the very least HSTs could be taxed. The fact that they're not, and the fact that they've been allowed to happen at all, is a political problem and not a technological one.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 29th, 2009 at 05:40:11 AM EST
[ Parent ]
HSTs HFTs
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 29th, 2009 at 05:41:22 AM EST
[ Parent ]
And yes, buying and holding would slow down the market. A two to four week period would be about right, as a random guess, to eliminate predatory shorting, exploratory non-trades and pumping and dumping.
How exactly? The only thing a four week holding period would do is that the speculation tricks would begin four weeks later. Remember Henry Ford's great invention, the assembly line? It takes a long time to build one car, but if you start thousands in staggered intervals, then they come out the other end every couple of minutes. The same principle can apply to stocks with a holding period. An investor can still short a share, since he doesn't own it in the first place, he'll just borrow one from someone with an elapsed period. Pumping and dumping is a scam that works regardless of a holding period, etc. Finally, and perhaps most importantly, stock is only one type of security. Speculation is rife on all sorts of other contracts which wouldn't have a four week holding period.

And yet for some reason anything that happens on a stock market is supposed to be immune from legal oversight - why, exactly?
I never argued that, in fact I agree entirely with your sentiment. But we can't go back to a pre-computer world. In truth, the pre-computer stock market is no panacea either. For example, during the 1929 crash, the stock tickers were hours late in printing up-to-the-minute prices. Think of this as a crude form of holding period. Investors had the choice: act quickly with no clue at all of the current price, or wait some time to at least read the price of a few hours ago, and act too late anyway. A more serious problem with getting rid of computers is that the huge numbers of transactions would be curtailed, and accounted for by armies of clerks with pencil and paper.



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$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Wed Jul 29th, 2009 at 07:05:38 AM EST
[ Parent ]
Because at some delay time the balance of risk moves from second-guessing random market movements - some of which are driven by insider trading and privileged knowledge - to second-guessing likely company performance in the real economy.

That point may not be a month, but I'm finding it hard to believe that enforced extended buy and hold, perhaps combined with strict volume limits, would have no effect at all on market dynamics.

Obvious manipulative plays can always be banned.

Of course no one likes the idea of not being able to sell instantly if the market tanks. But perhaps the market is much less likely to tank if no one is allowed to buy and sell instantly.

Once you eliminate predatory shorting and other games, real world conditions and disasters become the main driver of the markets. So you then have an incentive to minimise real world environmental risks too.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 29th, 2009 at 07:45:02 AM EST
[ Parent ]
I'm sorry, theres' something I don't understand about your shorting claims.

Say company A intends to own a particular stock over a long period. The speculator sells the stock, then borrows it from company A. At some later time, perhaps immediately, he buys the stock from company C, which has owned it for a long time (so it is allowed to sell it now). It's true that the investor can't sell the newly acquired share again for four weeks (say), but so what? He keeps it until company A demands it back, or else he gives it back to company A straightaway. Since company A intends to keep the stock for a long period anyway, the inconvenience of not being able to sell within the current month is meaningless to it. And even in the contrary case, suppose company A actually wants to sell the share within the month. An equivalent transaction could be performed using an appropriate derivative.

In fact, with the appropriate derivatives, one could simulate a stock market without the holding period restriction on top of the real stock market which has the restriction. An outside observer would see shares being exchanged every day, but the actual shares involved would be choreographed so that each share gets bought/sold at four week intervals.

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$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Wed Jul 29th, 2009 at 08:51:01 AM EST
[ Parent ]
The claim isn't about possible workarounds, which I'm sure are almost limitless, but about a generic requirement for owners to hold stock.

At the moment you're saying 'Yes, but to recreate a market you could...'

I'm sure this is true, but you're thinking like a market person who makes a living out of doing tricks like these.

If there's a blanket ban on all tricks - buyers must own stock, borrowing is not allowed, derivatives are only allowed for commodity deals where the buyer collects the commodity at the end of the deal - this all becomes froth and fantasy. Which is what it really is anyway.

The challenge is to couple finance back to the real economy. It does not need further schemes for further decoupling.

Currently the guiding principle is that all decoupling is good by definition, because it then becomes possible to make good money out of froth and fantasy.

If the markets are run on the principle that decoupling is very actively discouraged, irrespective of the forms it takes or may take, there's some danger of making markets manageable rather than cyclically horrific.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 29th, 2009 at 09:31:23 AM EST
[ Parent ]
The claim isn't about possible workarounds, which I'm sure are almost limitless, but about a generic requirement for owners to hold stock.
What long term effect does such a requirement have, if abundant workarounds exist? Shouldn't regulation aim to solve the root cause of the problem permanently? I'm suggesting workarounds precisely because I do not see how these ideas solve anything at all.

I'm sure this is true, but you're thinking like a market person who makes a living out of doing tricks like these.
Or maybe just a mathematician who doesn't mind seeing t's crossed and i's dotted once in a while :)

there's a blanket ban on all tricks - buyers must own stock, borrowing is not allowed, derivatives are only allowed for commodity deals where the buyer collects the commodity at the end of the deal - this all becomes froth and fantasy. Which is what it really is anyway.
How would you blanket ban all tricks? One man's trick is another man's legitimate insurance contract. IIRC, as long as put and call options are allowed, *any* complex claim can be replicated in principle. They represent universal building blocks for contracts. And what about middle-men? The reality of specialization in society means that you get people who don't own stock directly but act with it like they do on behalf of others. So you must allow even more tricks for this system to function.

Currently the guiding principle is that all decoupling is good by definition, because it then becomes possible to make good money out of froth and fantasy.
Yes, but remember that good money itself is fantasy. It's been so ever since governmnents went off the gold standard. There are no physical limits to the growth of the money supply. In this sense, there is no "real" economy.

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$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Wed Jul 29th, 2009 at 07:32:39 PM EST
[ Parent ]
How would you blanket ban all tricks?

Easy as an atom bomb.  Legislate a few defined financial market procedures and make any innovations subject to legal review and challenge prior to implementation.  Make any unapproved procedures felonies.  Define in law the purpose of financial markets as providing investment capital to socially useful projects and set up regulatory procedures accordingly.  This would be like dropping a neutron bomb on Wall Street, but that, arguably, would be a good thing.  When you have a giant parasite on the body politic the parasite needs to be destroyed.

In an earlier diary, (you only really have to look at the first graph), NBBooks delineated rather well how existing US financial markets have become so polluted by financial manipulators as to be toxic to the purposes of legitimate investment, the very function which they use to justify their existence, and we have recently discussed the lengths to which companies go to avoid exposing themselves to the "discipline" which Wall Street imposes.  

The benefits of the decisions to allow the existing system, which were decisions not to regulate and to remove regualation, accrue entirely to the benefit of the most successful manipulators in the financial markets, Goldman Sachs far and away.  How does letting Goldman suck more and more of the wealth of the nation into the hands of its small number of employees serve any purpose that that of those employees?

This is not a math problem with a logical solution.  Capital and capitalization is the organizing principle of modern societies. The effects of the existing situation are not morally neutral.  If your political and moral compass indicates that it is appropriate for Goldman to own the US Department of Treasury, to rent the US Senate, to dominate and intimidate the rest of Wall Street and to suck the life out of the rest of the economy, then, in effect you are saying that the cleverest thief wins, that who ever can most effectively grab and most ruthlessly use power is the legitimate ruler of our society.  You are saying that you prefer a system that logically leads, at best, to a thinly disguised autarchy over a system of limited pluralistic democracy. If that is your preference, be glad because if we are not already there we are within shouting distance, but I seriously doubt this is really your desire.

The first impulse is always to see as impossible something that we really don't want to do anyway and if we want to do something we tend to see it as inevitable.  The first step towards getting out of Hell is believing that it can be done.  Monarchies, dictatorships and oligarchies all have been overthrown.  The existing system too can be ended and replaced with a better system.  I know that the existing system will be replaced.  I do not believe that it is inevitable that it will be replaced with something better.  But if we care about our future and that of our children we have to work for a better future.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 29th, 2009 at 09:43:53 PM EST
[ Parent ]
How would you blanket ban all tricks?
Easy as an atom bomb. Legislate a few defined financial market procedures an make any innovations subject to legal review and challenge prior to implementation. Make any unapproved procedures felonies. Define in law the purpose of financial markets as providing investment capital to socially usef projects and set up regulatory procedures accordingly. This would be like dropping a neutron bomb on Wall Street, but that, arguably, would be a good thing. When you have a giant parasite on the body politic the parasite needs to be destroyed.
You're arguing for a whitelist approach. Let me ask you: does the proposed whitelist include the simplest kind of put and call options? If so, then you've lost. General claims can be built up from only those(*), so your whitelist stops nothing at all, however many pages the legislation comes out to be.

Thus by the above, you are really arguing for a world in which no kind of puts/calls are allowed in any form, period. I am not opposed to such a world, but if you have to argue your case and someone points this out, what do you say?

The ordinary use of a put/call is a kind of insurance: it is entered into for protection against wild stock price fluctuations at some future time.

This is not a math problem with a logical solution. Capital and capitalization is the organizing principle of modern societies. The effects of the existing situation are not morally neutral. If your political and moral compass indicates that it is appropriate for Goldman to own the US Department of Treasury, to rent the US Senate, to dominate and intimidate the rest of Wall Street and to suck the life out of the rest of the economy, then, in effect you are saying that the cleverest thief wins, that who ever can most effectively grab and most ruthlessly use power is the legitimate ruler of our society.
All I'm saying is that the math says no to simple minded ideas that sound good but leak like a sieve. I'm not defending Goldman at all, rather I am saying that (as I see it) Goldman will laugh off these puny attempts if some US legislators do actually try them. It would be much more effective to just kill Goldman outright, or nationalise them and convert them into a nonprofit.

(*) Technically for those who want more details: a convex function f has an integral representation in terms of the functions (x - k)_+, and the latter are used to define call options. Thus one can build arbitrary differences of convex functions of an underlying asset using combinations of puts and calls, and this is plenty enough for any practical purpose of speculation, I should think.

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$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Thu Jul 30th, 2009 at 12:23:42 AM EST
[ Parent ]
I am not a trader.  If puts and calls open Pandora's Box, unless a safe remedy can be found, I would ban them, had I the power.  I agree that GS should die--by  the Sherman Anti-Trust act or a new law if required.  Their continued existence seems incompatible with the rule of law and a properly functioning representative democracy.  The financial services industry, Goldman Sachs and the epigoni, is the only part of the society that has any true representation at present.

If most of the financial industry were to disappear it would mostly mean that a lot of people would have to start making honest livings.  All of the vaunted innovation has only led to the impairment of the economy and the enrichment of the individuals comprising the financial industry.  I do not see how recovery is possible while continuing to feed a parasite of that magnitude.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 30th, 2009 at 02:00:19 AM EST
[ Parent ]
If puts and calls open Pandora's Box, unless a safe remedy can be found, I would ban them, had I the power.
Yet doing so if you could would open you up to the counterargument that these options are just insurance, eg why should ordinary people or companies be exposed to the full risk of owning stocks with fluctuating prices when an option can limit the potential fluctuations for its holder, and thus bring a measure of financial certainty in planning for the future? You must be able to answer this question (convincingly) in the negative or the proponents of the markets can use this argument.

In some ways this is as difficult as the gun debate, namely how do you convince people that nobody should be allowed to own guns, when the gun lobby responds by asking why should people live at the mercy of burglars and armed attackers with no protection?

If most of the financial industry were to disappear it would mostly mean that a lot of people would have to start making honest livings.
I doubt it. I believe it would involve a lot of pain and misery throughout, which I'm ok with. But clearly, governments around the world have been scared to death of the pain it would bring to their countries, which is why they largely preferred to guarantee the gamblers' debts.

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$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Thu Jul 30th, 2009 at 02:54:24 AM EST
[ Parent ]
martingale:
Yet doing so if you could would open you up to the counterargument that these options are just insurance, eg why should ordinary people or companies be exposed to the full risk of owning stocks

Why should ordinary people or companies be exposed to the full risk of devastating cyclical market mood swings?

I believe it would involve a lot of pain and misery throughout, which I'm ok with.

With the current system, there's already plenty of pain and misery throughout.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 30th, 2009 at 04:59:48 AM EST
[ Parent ]
Why should ordinary people or companies be exposed to the full risk of devastating cyclical market mood swings?
Indeed, that is where serious questions must be asked about the true value of the financial services sector, and the wisdom of relying on it for pension funds, corporate finance, etc. vis-a-vis alternatives. There is also the question of the immediate consequences of decoupling by shutting large parts of it down.

With the current system, there's already plenty of pain and misery throughout.
But is it sufficient to catalise major political change? I doubt it. People are far from having lost everything they can, yet. If Russian society under Yeltsin is any indication, it can get a lot worse until someone decides to really put the screws on the financial oligarchs.

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$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Thu Jul 30th, 2009 at 06:27:06 AM EST
[ Parent ]
  • Make put and call options subject to the doctrine of insurable interest. Outside hedging - which should always be subject to the doctrine of insurable interest - puts and calls serve no legitimate purpose that I can see. That kills non-linearity and extra margin (the two most troublesome aspects of puts and calls) dead in one blow, without harming the legitimate functions of these tools.

  • Similarly, make commodities markets open only to participants who actually have the capacity to make or take delivery, and do not permit them to purchase more futures than what they can take delivery of.

  • Enact a blanket prohibition on naked shorting of any kind.

  • Make over-the-counter securities and commodities derivatives legally unenforceable. Security and commodity derivatives need to go on exchange. Make all attempts by private players to deploy their own economic power to force compliance with such contracts a form of blackmail.

  • Oh, and a blanket 2-5 % Tobin tax on all exchange transactions should kill much of the excessive liquidity dead.

Similar schemes can easily be devised for blowing out an atom bomb over black-hat speculation in other markets.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jul 30th, 2009 at 02:21:57 AM EST
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Jake,
If puts and calls open Pandora's Box, unless a safe remedy can be found, I would ban them...

You illustrate why I included the "if"!  I have repeatedly called for a requirement of "insurable interest in CDSs and extending it to puts and calls should be obvious, but it wasn't to me at the time I wrote the comment.  Thanks.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 30th, 2009 at 10:46:41 AM EST
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