Saturday, 17 July 2010

How Brokers Became Bookies: The Insidious Transformation of Markets Into Casinos

Derivatives are basically just bets. Like at a racetrack, you don't need to own the thing you're betting on in order to play. Derivative casinos have opened up on virtually anything that can go up or down or have a variable future outcome. You can bet on the price of tea in China, the success or failure of a movie, whether a country will default on its debt, or whether a particular piece of legislation will pass. The global market in derivative trades is now well over a quadrillion dollars - that's a thousand trillion - and it is eating up resources that were at one time invested in productive enterprises. Why risk lending money to a corporation or buying its stock, when you can reap a better return betting on whether the stock will rise or fall?

The shift from investing to gambling means that not only are investors making very little of their money available to companies to produce goods and services, but the parties on one side of every speculative trade now have an interest in seeing the object of the bet fail, whether a company, a movie, a politician or a country. Worse, high-speed program traders can actually manipulate the market so that the thing bet on is more likely to fail. Not only has the market become a casino, but the casino is rigged.

High frequency traders - a field led by Goldman Sachs - use computer algorithms to automatically bet huge sums of money on minor shifts in price. These bets send signals to the market that can themselves cause the price of assets to shoot up or tumble down. By placing high-volume trades, the largest speculative traders can, thus, intentionally "fix" prices in any direction they want.

http://www.truth-out.org/how-brokers-became-bookies-the-insidious-transformation-markets-into-casinos61322


[Posted at the SpookyWeather blog, July 17th, 2010.]

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