Saturday, October 04, 2008

In Defense of Speculators and Short-Sellers

Everywhere today government bureaucrats and media pundits blame unwanted price movements on speculators and short-sellers. If prices are “too high”--it’s the fault of greedy speculators; if prices are “too low”--it’s the work of evil short-sellers. To hear these critics tell it, speculators have the ability to create artificially high prices, while short-sellers can wantonly destroy sound companies.

The critics then claim that since neither speculators nor short-sellers perform any positive economic function, barring them from the marketplace is an appropriate remedy, one that’s long past due.

If prices are to reflect reality, they must be the result of an objective process of discovery and judgment performed by interested actors. Just as doctors specialize in identifying and evaluating the facts affecting health and disease, speculators and short-sellers specialize in identifying and evaluating the facts pertinent to market prices. They make it their business to understand economic facts like supply and demand, and then risk their capital on their judgment, properly profiting if they’re right and losing if they’re wrong. Thus in a free market, rather than prices being set by wish or decree, they are set by a rational process, one which benefits from the knowledge of all who participate.

Speculators and short-sellers don’t create facts, they seek to identify and respond to them; and in the process they help adjust prices to economic conditions and establish smooth and liquid markets. As a result--instead of being scapegoated and banished--they should be respected and welcomed for the productive role they play in our markets.


~Trader, speculator and short-seller
Amit Ghate

3 Comments:

At 10/04/2008 11:12 AM, Anonymous qt said...

Thus in a free market, rather than prices being set by wish or decree, they are set by a rational process, one which benefits from the knowledge of all who participate.

For this statement to be true, we would have to agree that markets are "rational". Lately, the global markets are not looking very rational.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Can you describe any activity that involves people as even remotely rational?

 
At 10/05/2008 1:52 AM, Anonymous Anonymous said...

Yeah right, I'd get **PHYSICISTS** to do the analysis too. That way they won't be tainted by any knowledge of economics or human behavior.

 
At 10/05/2008 8:29 AM, Blogger juandos said...

"That way they won't be tainted by any knowledge of economics or human behavior"...

Well anon @ 1:52 AM if physcisists aren't human, what are they? Dolphins? Martians? Beings from the Middle Kingdom?

 

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