Trader or Speculator?

I was trying to concentrate on giving a presentation on global markets last week whilst staring out over the stunning St Aubyn’s Bay in Jersey, and I found myself having to answer a similar question several times – on the lines of “are speculators ruining our markets?” Well in fevered markets it is easy to take a swipe at investors and traders to accuse them of profiting from speculation. Most recently it has been the furore over commodity prices and especially the volatility in the price of crude oil that has resurrected this wave of suspicion.

It is always much easier to blame invisible manipulators that are seemingly amassing huge piles at others’ expense. These are evidently evil people behaving in a Machiavellian and conspiratorial manner with the intent of obviously twisting the markets to their own wicked ends. From shades of the old Eddie Murphy film ‘Trading Places’, through to the dastardly villains intent on world domination in the Bond stories, these seem to be far more acceptable reasons for excess price rises rather than something as dull and mundane as just old fashioned supply and demand.

In fact the history of speculators moving markets to their advantage is littered with farce, failure and fiasco. From the destruction of the Bunker Hunt family assets in their bungled attempts to corner the silver market, back to the Dutch Tulips disaster and the South Sea Bubble – they nearly all seem to end in failure, especially when faced with the reality of the open market and its demand. Some have argued that one of the exceptions to this was George Soros’s attack on Sterling which contributed to the UK being “kicked out” of the ERM back in 1992. In fact I would argue that he was acting as a perfectly reasonable
investor taking open advantage of a mis-pricing of the market. That was a wonderful example of political pride and ego against financial and economic logic. I think further that the resetting of Sterling following the financial mauling of the currency by Lord Lamont turned out to be one of the key turning points for the UK economy and certainly set a new base for growth from that period. The period following under the stewardship of Ken Clarke certainly benefited, as did the current 1st Lord of the Treasury, Gordon Brown.

Does this mean that we should ignore such speculation? No certainly not, in fact very much the opposite. The fact that we find people betting in one direction or another can give us vital clues as to the attitude of the market and where it might move next. The key issue is that there are now far more accessible tools which can be applied by investors of all sizes, not just the Soros heavyweights of this world. From Contracts for Difference, Spread Betting and Exchange Traded Funds, the range is now much broader. The result has been that there are now more people capable of having a view and acting on it.

Additionally, the past two decades have seen a huge growth in the breadth and access for investing in non mainstream asset classes, to such an extent that many of the so called ‘alternatives’ are no longer that - they are just another core asset class. An example would be property in all its variations and also commodities both soft and metals, and of course currencies and oil. So will speculators have an influence? The answer is quite obviously yes but, rather than cornering the market for their own ends, they actually help in forcing the price formation of a two way market. This can mean that they can at times increase volatility but significant manipulation would be going too far. Having said this, that does not mean that such antics don’t go on – especially in the unregulated wild world of the hedge fund industry. But even here the history of hedge funds is littered with failed bets against a market going the other way.

The key issue for an orderly market is to continue to press for as much transparency as possible – but that is not always possible. However we should be careful about rushing into over regulation here either as that will just push such trades further overseas and further from our ability to see them.

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And finally…………I see that that an international beauty competition in the United Arab Emirates has attracted some £4.5 million in prize money for the successful contestants. This is not just a choice of perfect beauty, but of breeding and poise – oh yes and you have to be a camel. “One hump or two sir?”

Have a good weekend,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

P.S. How desperate are our house builders? I saw a sign on Bolton railway station - “Reserve now and we will pay your mortgage for two and a half years”. Gosh.

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This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.