Wednesday, 12 May 2010

Las Vegas is passe; bet on the Exchanges


Last Thursday, something peculiar happened in the US stock markets. The markets were jittery due to the unfolding crisis in Greece. The market was down by some 1.5% or so , but nothing extraordinary. Then at 2.32 PM something happened. It started falling steeply. By 2.42 PM it had fallen by 3.9%. By 2.47 the bottom had fallen out; in 5 minutes the index fell another 5.5%.By 2.49 it went back up by 5%.

Nobody knows what happened. Multiple theories abound. Hacking or terrorist activity have been ruled out. The rumour that a trader keyed in a trade in P&G shares for billions instead of millions by mistake has also not been borne out. The SEC is still investigating.

What triggered the fall is not clear, but what happened next is certain. A lot of trading is computer driven these days. When something happens there are automatic triggers to buy or sell. When the first fall happened, it triggered an avalanche of computer generated trades. Hence the free fall. These days competitive advantage amongst traders is counted in speed of response time. Goldman Sachs famously claims that it has a huge competitive advantage because its computers are a few nanoseconds faster than anybody else.

What has the world come too when computers fight against other computers in speculation and cause spectacular gains and falls. None of this is real They serve zero economic value. The oft repeated argument that speculation ensures liquidity in the market has been stretched to absurd levels when computers are fighting other computers for nanasecond advantages.

This is the United States of America. Where gambling is banned except in the state of Nevada and in some small pockets such as Atlantic City and Indian reservations. Online gambling is completely banned; the US spends a fair amount of money trying to shut down internet gambling. And then they allow stock exchanges to go completely berserk. In pure shotgun gambling that would put Las Vegas to complete shame. The sin city is small change ; its entire annual revenue is probably bet in a day on the exchanges.

Here’s an idea to solve the US deficit. Impose a gambling tax on the exchanges. Because they are nothing but gambling dens. Ignore their bleating of how they serve a useful economic function (99.9% of them don’t). Bite your lip at the huge fall in the Index that will happen immediately. Laugh at threats that they would take their business to other countries.

Some decades ago America cleaned up the gambling in Las Vegas and sent the mob that was controlling it packing. I think attention must now be turned on the Exchanges.

19 comments:

  1. Anonymous12/5/10

    for a institution solely surviving on volatality..its aptly named after "change"...our inhouse vaasthu expert suggests some changes..

    1) Building munna irukara erumai maadu symbolises death and negative things. Athuku badila nalla jersey pasu statue vaikanum

    2) That bull/cow's rear shouldnt face the entrance of the building.. as it is lot of bullshitting happens in the name of calculations..so atleast clean entrance is a must.

    3) rahukalam..emakandamla trading should be halted.

    4)ashtami navamila stock market holiday announce pananum.

    ussssss...ebba..ithukkay kanna katuthay

    ReplyDelete
  2. Are you serious in your suggestion?
    I think implications of being in a nanny country.

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  3. Isn't this article a 'speculative gamble'? :-)

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  4. Gambling tax sounds ominous! Remember the commotion that STT created? We can expect 10 times the commotion for imposing gambling tax. But then, where else can you make so much money legally other than in Stock Exchanges? No wonder the next door aunty and the back lane grandma are keeping their hands full with trading on the exchange!

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  5. Now when I think of it, it does look skewed. Stock exchanges that were simply meant to be a free market have indeed turned into gaming parlours. The state of art technology that is involved in placing orders online, pricing the stocks, keeping records, analyzing activity, is indeed commendable. But all this was meant to facilitate free trade, which is not the core idea on any exchange anymore.

    The Thursday fiasco indeed is a stark example of how its just a mob frenzy now a days rather than what it was meant to be.

    But I am still not clear on one thing. I can somewhat see the difference between trading and speculating. But strictly on a stock exchange (not the companies perspective), how can anyone say that a person making profit on a day trade is morally wrong? Also, then why is short selling not so wrong?

    [As you can see, one good thing that came out of that 'punk-kid' era was I am not ashamed to ask dumb questions :)]

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  6. Anonymous12/5/10

    @Gils- You are great, oh knowledgable one! Has to be the bull's rear behind it all! :D :D

    deepa!

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  7. Hope it is just "one day's joke" on the US stock market.

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  8. @Gils - Simply brilliant. Where do you get such fantastic ideas. You are hereby crowned comment mannan (Comment King)

    @ambulisamma - Serious in a way. taxing something doesn't make a state nanny. In more educated circles, this tax is called the Tobin Tax. This idea has been floating around for a while, although not motivated by the argument of anti gambling.

    @RamMmm - Speculative gamble indeed. Its a round about way of backing the Tobin Tax. We already have it in India - the Securities Transaction Tax.

    @Durga - The STT is the exact example. After some noise, what happened. Nothing. Gamblers will gamble even if you stock the odds against them Its a basic human instinct !

    @Deepa - The concept behind exchanges were noble indeed. Freedom, transparent pricing, liquidity, etc etc have all been the cornerstone of the economic boom over the last 200 years. A dies hard free trade advocate like me should be rabidly in favour. But even I realise freedom doesn't mean you can shout Fire Fire in a crowded theatre. Exchanges have grown to be monsters that need some curbing. Freedom is not, and cannot, be absolute.

    @Dave's mom - This was an aberration. there are defense mechanisms built into the exchanges to stop chaos. But the underlying gambling has grown to such proportions that they threaten the stability of the financial world.

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  9. Hi Ramesh,

    Just something that I read about this was that it was triggered by something termed as 'stop loss'. Apparently people (must be people who have spent zillions in getting computers a nanosecond faster than others) can set it in their system that if a stock does fall to a particular price put the stock up for sale. Since computers are 'intelligent' to execute all our commands stoplosses got activated when the prices of scrips started falling and turned into a sellers market which caused the bottom to fall off.

    This is rampant even in India and people do it offline as well (not sure how) to avoid taxation as well and cause prices to fluctuate affecting genuine investors as well.

    Tobin tax should do well - one of the views is that companies like PE Fund, VC Funds etc should be taxed for this profit as profit from business rather than Cap Gain taxes to attract higher taxation and reduce impact of speculation income...

    Mahesh

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  10. Incidentally, Brian Williams came on a late night show that very day. And he said, it was a sign of how fragile the whole economic system is. Your perspective is brilliant. It is nothing but abstract gambling and it is the middle class which has to feel the heat.Somehow the rich are still getting richer while hundreds and thousands of people are sitting unemployed. This is not what the supposed "land of opportunity" should look like.

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  11. Impose the tax, but do not call it as gambling tax, give some fancy name with a fancy acronym.

    I think to maintain the equilibrium of the ecosystem, we need good, bad and the ugly. Say hypothetically, there are no gamblers, no speculation, what will happen to the stock market?

    Yeah all this speculation definitely hurts, but it adds spice to life ;) Teaches you all things are ephemeral and this too shall pass[The high you get when the price rises and the low you feel when the price falls]

    ReplyDelete
  12. Anonymous13/5/10

    //http://business.rediff.com/report/2010/may/13/fake-divorces-in-china-to-buy-second-home.htm//

    vivaaga rathu to buy more sothu...itha pathi oru post podunga thalaivaray :)

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  13. @mahesh - Yes stop loss is a sensible strategy but does propogate the herd mentality. Nice idea to consider it as business income for those professionally in the business. But then most of this lot is all making this as short term gains, which will come back to roughly the same tax as business income I suppose.

    @blogueur - Its a very telling comment from Brian Williams. it is a fragile system indeed. Actually very true of many aspects of human life. If that clown in North Korea flips it and launches a nuclear missile to be met with instant retaliation from everybody else and we destroy ourselves for a trivial reason , well ......

    @Zeno - Yes, very good idea to coin a fancy acronym. Nice optimistic view that this adds spice to life. True in a way.

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  14. @Gilsu - Thanks for the idea. Sothu is the dominant religion here as I've posted before.

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  15. My baby likes playing with tapes (the ones which existed before the CD era). When he starts, its fun but as he entangles into the wires, he dosent know how to get out of it.

    Now even though an accountant, the rationale behind this bit of finance I have never internalized. While I understand that had there been no concept of an IPO, a reliance would have never got created, but what I many times feel is that stock exchanges are self created frankestiens. Yes, a marvelous invention, but no one know how and where to control.

    Your response to Deepa sums it all.

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  16. It is the herd mentality actually which presses on the panic button. Majority of investors go by the sentiments and in the process sometimes gain and sometimes loose. Obviously, there seems no logic... Nice idea of such taxes being in place. But how effective it would be, I am not sure!

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  17. @Sandhya - The complexity and the undue importance placed on short term movements by policy makers have created a monster which needn't have been one. There's clearly a need for some control, which I belieev can be achieved by taxation.

    @Vishal - "Sentiments" is just an euphemism for punting. It is just a legalised form of gambling and I don't see why it should not be taxed.

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  18. Hi Ramesh, do you want write about carbon credit trading ? :-)

    ReplyDelete
  19. @Kotla - Thanks for the idea. I know little about this esoteric idea, but since you have now mentioned it, let me read up on it.

    ReplyDelete

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