So, the Japanese stock market crash of earlier this week, with its knock-on effects all around the world, was all about panic, and not about substance. The markets have, near enough, recovered. Almost certainly, some people made a great deal from the short-term confusion that arose. And now we are supposed to move on as if nothing happened.
Except that it did. Japanese stock markets did reveal how exposed they are to the risk that the Bank of Japan can create within them by raising interest rates.
US markets demonstrated how vulnerable they are to trades funded with borrowings in Yen.
Other markets showed their capacity to panic.
That does not mean we need to move on. Instead, it demands that we appreciate just how vulnerable the world is to the absurd consequences of permissible decisions by central bankers and others. That vulnerability exists because of the inappropriate assumptions made by some in financial markets that they can act as if there is no risk of change when such risk exists. As a result, they build edifices on the basis of false assumptions.
We saw this in the debacle that the Bank of England created by announcing £80 billion of quantitative tightening in September 2022, which went on to panic markets that had built the so-called LDI trade on the assumption that such a thing would not happen in the way it was announced. The resulting panic brought down Truss. That might have been no bad thing, but it disguised the reality of what happened, which required considerable Bank intervention.
This time, it seems unlikely that any such thing was required: markets worked out they could manage the consequences of the Japnese carry trade changing.
But my point is that irrational market trades, undertaken for pure speculative gain without concern for the underlying supposed use of the assets traded, can have real consequences.
The question is, why do we allow such wholly unnecessary trades to exist when there is no real gain to society from them doing so?
I am not arguing against capital markets per se. I accept that they have a role. I accept that limited trading to provide liquidity for second-hand asset trades is necessary, given the way in which traded securities are issued and redeemed. However, the vast majority of trades in the vast majority of financial markets do not take place to provide finance for anything related to productive activity. They exist to extract speculative profit, and that is a burden on society at large, in my opinion, representing a vast waste of energy, resources and talent for no net gain, whilst creating considerable risk for society at large.
That is the lesson of this week.
It will be forgotten.
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“It will be forgotten”: Tulip Mania (or Vestas in 2012 – shorted to the point where it was valued at less than half break-up value).
The main rationale for the stockmarket (or electricity markets) is to make money for traders – voltaility is good.
The core fucntion: putting some value on a good, has been lost. High-speed trading & the construction of dedicated links to gain a couple of milliseconds (literally) on the opposition is, as you note, a waste of everything. Time for market reform (stock & elec & a few others).
Agreed
Richard,
A year or so ago I read a book about the history of Cosens of Weymouth and more recently about P&A Campbell. Both operators of Paddle Steamers and proprietors of engineering works.
Now before WW1 both companies aimed to pay a dividend of 5% on ordinary shares so I can see as an investor while their business’s were a bit risky you could I suppose make a decision about what a share was worth to you compared with Government Stock and decide what you thought might be a sensible price.
Looking at todays stock market however I cant see how you can make any sort of rational decision about what an ordinary share might be worth. Yes, there is the possibility of ‘capital gain’ but that depends on market sentiment so one day Dot Com, Housebuilders, AI or whatever might be smell of the month and you can offload your shares at an inflated price but its no more rational than Roulette.
I suggest the thing thats really keeping the stock markets afloat is the need to provide financial products that can be ‘valued’ such as Defined Contribution pensions, Unit Trusts etc and that savers are still putting their money into them.
Much to agree with
The City is a feeding frenzy that in part feeds on itself
I agree with all of that but as long as the market keeps selling its work as a ‘get rich quick’ scheme nothing will change. Everything is too short term.
The markets are not the most efficient processors of information because they do not discern from bad information or that which is withheld (they might not tell you that they will take a side-bet and get a cash payout if the investment they just sold you turns sour for example. Would you buy if you knew that they did that?).
The markets are the most efficient processors of greed and nothing more as they are currently constituted.
The market has the characteristics of “no free lunch” and the “price is always right”. If you want the value of the good you have to pay and the value of the good that you pay is the price. The market is said to be efficient. What it does not say is that the price is efficient. We don’t have an idea of a “good” efficient price, what is said to be a good is the item for sale.
Would you like to see a system where both parties to a trade have to complete a form to explain the reasons why they have come to a mutually agreed price. A committee would then review their responses to determine if they’re rational players. We could call it soviet market trading.
No
Simon
Most revealing.
You do realise that the opposite of everything you have described above sounds fraudulent to me?
You don’t need a committee either – you just need the common based law – which the city ignores completely and make its rules and language. Oh – and honesty. Yes. Honesty.
Are you a used car salesmen perchance?
Mr Hosking,
The fact that your example would be intolerable, doesn’t make a casino the sensible alternative; especially one frequented by Mr Ponzi, who seems to do quite well out of it, from time to time.
The general advice given over stock markets is that it is best left to the “professionals”. Unfortunately the “professionals” persuade pension funds to invest in stock markets, so the “professionals” can improve their returns above gilts to attract funds, to prove they are the “professionals”, who alone understand stock markets. And somehow we end with pension funds dealing in LDIs, and by mischance, or lack of professionalism, or bad government, or poor regulation, or bungled central banking, or all of them together; arrive at the brink of the abyss.
How did that happen? Because it’s a great system. Oh, well that’s all right then.
Is there a case for a tax on the trading of shares? A few years back I recall a proposal for 0.1% tax on them.
Yes
There is a case for a Tobin tax
Thank you and well said, Richard.
This bankster endorses your message.
@ readers: Richard’s conclusion is spot on. The City is a rentier. 2008 was a missed opportunity to put finance in its box. We are still living with the consequences of that. I think the USA is, too.
Please remember this: “However, the vast majority of trades in the vast majority of financial markets do not take place to provide finance for anything related to productive activity. They exist to extract speculative profit, and that is a burden on society at large, in my opinion, representing a vast waste of energy, resources and talent for no net gain, whilst creating considerable risk for society at large.” City traders are no different to market traders and even Del Boy.
Thanks
I agree with what you say, except when you say it will not be forgotten. I hope you’re right. Sadly, I suspect you may not be.
For example, Long Term Capital Management thought they had it all figured out. They made spectacular profits for 3 years. Then they went spectacularly bust. But almost everyone has forgotten what happened only 25 years ago.
But perhaps a Tobin tax might help stabilise the market a little.
Did you mean QT rather than QE for BoE actions in September 2022?
Yes
You should change it in the text IMO, it’s very misleading at the moment to the casual reader.
Done
Sorry, it’s been a very busy morning
The problem is a function of globalisation, and effectively reducing the whole world economy to nothing more than a gamble on a margin spread, and the unintended consequences (never foreseen by regulators) of opportunity and access. The opportunists do not know what they are doing, and that is a reminder that nobody knows what they are doing; most of all the “experts”. The dynamics and power of money looks easy to understand. It isn’t. It is an arcane mystery, wrapped in an esoteric puzzle.
Agreed
A tax on speculative high frequency trades sounds so obvious.
Presumably it’s now technically feasible.
The reason it no longer seems to be on the agenda must be to do with the corrupt City-funding of the political decision makers.
It would be easy to do
The opposition is entirely political, funded by the City
A tobin tax just means no trades would pass through our shores.. it would raise no tax and would have zero impact on activity.
Politely, don’t talk total nonsense
We have a stamp duty (SDRT) at 0.5%, which is high, and that does not prevent trades
I wish you trolls were not so stupid
No high frequency trader ever deals in securities to incur stamp duty.. none do and never had. Clive will endorse this. If you had experience in financial markets you would know that, Have you looked at LSE trading volumes btw and who lists there? It is a pale shadow of years gone by. Other trading channels and listing jurisdictions have taken over.
I do, of course know that
But let me be clear: no one needs high frequency trades
That would be the best outcome of such a tax
What about that do you not understand?
Brian,
Austin Gerig, an SEC Risk Analyst offered this caution in a personal paper on HFT: “Price synchronization is normally beneficial in markets, but it also can have harmful effects. If shared misconceptions exist in the population of investors within the model – causing for example, a large number of sell orders to be submitted even though the final prices of most securities are higher – then synchronization makes
transaction prices less accurate. In addition, when prices are tightly connected to one another, errors quickly spread through the financial system. To mitigate this risk, HFT firms can program their systems to exit the market when errors are detected. But determining the difference between an extreme event and an error is precisely the type of problem that machines find difficult. Machines that continually stay in the market risk propagating errors when they arise. Machines that leave the market at the first sign of an abnormality will often disappear at the precise time they are most needed. The end result is a financial system that becomes unstable during times of stress and behaves very much like US markets did during the Flash Crash”*.
In addition it is worth mentioning that ‘ghost liquidity’ (the fact that liquidity disappears as quickly as it appears) is scarcely a compelling sales pitch.
* The Flash Crash was a massive US stock Market crash, May, 2010 that lasted thirty minutes, but led to an SEC investigation that suggested HFT was a factor. It is worth noting that on 28th March, 2024 Forbes reported that: “JPMorgan Chase’s top global equity strategist Dubravko Lakos-Bujos told clients this week to brace for the possibility of a ‘flash crash’ which could ‘come one day out of the blue'” (Derek Saul).
One witty critic and commentator referred to a ‘fat-fingered’ trader starting it. Glad to see the traders are prudent and cutting-edge. The regulators didn’t look great either; Model-T Fords chasing McLarens.
Sometimes it is worth looking beyond how fast decisions, and money can be made…..
“That is the lesson of this week. It will be forgotten.”
As individuals, we here, will remember, True. But, most of the media will forget. It demonstrates to me that markets should not be held up as ‘the final solution’, that there isn’t something better.
Nothing will be done to change the system because it enriches so many that are involved in the finance industry. They have even managed to sell the ‘too big to fail meme’. They have changed the rules so that ordinary people with small savings in Banks, will find those funds swallowed up bailing the system out in times of severe trouble.
This is insane and change is needed. But what actions need to be taken? And, how will sane ideas get implemented when we, the general public, have no power?
I have no solutions, just a growing frustration.
It seems to me to be only a matter of time before there is some highly disruptive event that does cause our financial system to be disrupted in some significant way. It seems obvious to me that with the high level of interconnection (internet etc), and consequent inter-dependence, that now exists, our vulnerability has grown. Central Banks seem to be the main guardians of stability but they are an integral part of the financial system. I suggest an independent guardian organisation is needed in each country.
[…] By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future […]
I believe that all stock markets are gambling dens with no benefit to society in general.
A word on stock markets. They exist so that investors who buy shares issued by companies can liquidate their investment. Without them, it would not be an investment. An investment is something where one can expect to recover the money invested. Companies’ shares would be open ended annuities with varying rates of return & shareholders perpetual part owners of the company. So you can forget pension funds buying them, for a start. Or anyone using them as a temporary home for their savings. Unless you’re proposing companies have to enter into an agreement to buy their own shares back on demand. In which case where would the companies get the money from to do that?
A couple of minutes trading a day would be enough to achieve your stated goal.
What is the rest for?
You know you’re bullshitting, and so do I.