Neoclassical free market orthodoxy, by which the world is still ruled, makes no distinction between real and speculative markets. Both are granted maximum freedom to grow. Speculative markets started as a strand within the financial sector which itself was brought into existence to support investment in the first industrialisation. But while the size of real markets is limited by the ‘appetite’ of potential customers, speculative markets have no such limit. Their growth has been phenomenal; the market for derivative securities has already been estimated as close to the GDP of the planet and many times the value of the world’s stocks and shares. But that is only the start.
The securities themselves need have no other substance than the possibility of a rising price. They may or may not be derivative from securities that do have substance, but their fundamental value is deliberately obscured so as not to limit the possibility of a price increase. In real markets, such obfuscation has been legally restricted. In most jurisdictions, a statement of ingredients is mandatory and disclosure of their source is becoming advisable, while any suggestion that magic is involved in a product’s performance has long been illegal. No such restrictions have been imposed on speculative ‘products’.
The European Central Bank has warned that low cost ultra-fast automated systems, which are focused on speculative trades, will likely “trigger a number of risks for orderly trading and financial stability”. Nevertheless, the world’s stock exchanges profit from such systems and encourage their adoption regardless. As reported on this site last October, they already account for 80% of Wall St trades with London catching up fast. Two weeks ago, the London Stock Exchange introduced the NXT Direct system, enabling clients’ direct connectivity to exchanges with, according to global financial services group Nomura, an ultra-low latency of 2.8 microseconds. That would prevent consideration of a security’s value fundamentals, even if such information had been made available.
The size of the speculative market is effectively infinite, limited only by the creativity of those innovating new ‘products’. Acquisitions and Mergers continue to provide opportunities for the extraction of value; Nomura themselves aim to ‘significantly enhance’ their ‘M&A footprint’. But the damage done by speculative markets extends far further than their parasitic destruction of the real economy.
Innovatory new securities are continually extending the killing fields of speculation. As previously noted, a security related to carbon credits promised a median return of 229%. The current violence in Libya has added spice to the speculative market in oil. All of the issues surrounding climate change and the long term problems of global population growth and sustainability, are fertile areas for the creation of new securities, the true nature of which will be kept deliberately opaque. The financial sector’s attention is focused entirely on what might offer a microsecond of profit and perhaps develop into a new bubble, without consideration of the victims of the price volatility they create, never mind the mess they leave when bubbles burst.
Food insecurity has already been flagged up as a prime opportunity, as global population approaches its sustainable limit of 9.5 billion over the next four decades. The prices of wheat are already in play and the third world, notably sub-Saharan Africa, will inevitably pick up the tab, starving for the benefit of rich country speculators. In a more anchored world, such activity would be illegal and its perpetrators locked up as arch criminals.
Real and speculative markets are hugely different and the difference will in due course have to be recognised in global tax and regulatory systems.