Is trading moral and ethical?

Discussions about personal psychology for the individual trader.
alp
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Is trading moral and ethical?

Post by alp » Sun Dec 21, 2008 7:56 am

Do you think that making money out of systematic speculation in the markets without any commitment to some kind of productive work in the real economy is a lofty goal? Is it moral and ethical?

sluggo
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Post by sluggo » Sun Dec 21, 2008 8:55 am

Not a new question, obviously.

John Ryan wrote an essay 106 years ago, "The Ethics of Speculation", whose first page is reproduced below.

Yale University presented a lecture series 99 years ago, "Topics in Every-Day Ethics", that included a lengthy discussion on the ethics of speculation. I've attached the full text of the lecture below; here is the beginning:
EVERY-DAY ETHICS

ADDRESSES DELIVERED IN THE PAGE
LECTURE SERIES, 1909, BEFORE THE
SENIOR CLASS OF THE SHEFFIELD
SCIENTIFIC SCHOOL, YALE UNIVERSITY




SPECULATION

A CHAPTER on the ethics of speculation will prob-
ably seem to many people to take inevitably the
form of the famous chapter on Snakes in Ireland,
viz., that there are no ethics in speculation. And
I fear that a lecturer on this subject who takes a
different view will be thought to be in the position
of a classmate of mine, who, on going into an ex-
amination in ethics, remarked that he " didn't know
an ethic when he saw one." Nevertheless I feel
convinced that one of the chief obstacles to the
achievement of a higher moral tone in business is
the indiscriminate denunciation of certain business
practices, without any careful preliminary analysis of
their real nature. When popular writers are con-
stantly pouring out invective against things which
practical men know to be necessary, there is grave
danger that these same practical men will become
callous to all criticism, and will refuse to see the
moral iniquity of certain forms of business which
are not necessary. In order to make moral con-
demnation most effective it is important to take
pains that it shall not be misapplied, and it may
consequently prove as beneficial to show the right-
eousness of conduct which was formerly held to
be evil, as to prove the iniquity of conduct formerly
held to be righteous. Moral improvement does not
necessarily consist in increasing the number of pre-
scribed practices. In his penetrating book on
Ibsenism, Mr. Bernard Shaw divides the pioneers
of society into just these two classes, the one
made up of those who persuade the community
that the practices which they had tolerated in the
past are really vile; the other made up of those who
persuade the community that the practices which
they had tabooed in the past are really without
taint. He shrewdly and wittily ascribes the greater
weight attached to the teaching of the first order
to the fact that society's guilty conscience is always
more ready to believe in the evil of its own con-
duct.

I feel sure that observations such as these will not
be understood by you to be meant in any flippant ...
Attachments
essay_1909.txt
Every-Day Ethics: Speculation (full text)
(48.79 KiB) Downloaded 941 times
johnryan.png
first page of Ryan's essay
johnryan.png (56.4 KiB) Viewed 21496 times

Paul King
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Post by Paul King » Mon Dec 22, 2008 8:39 am

If the market is open to anybody, has equal access, no rules that favor or penalize any one group of participants, and nobody is forced to participate, how can the act of speculation be unethical or immoral?

It's a voluntary game where the rules are well defined and generally well enforced/policed. Attempting to break, bend or fraudulently manipulate the rules (or other participants) can be both immoral and unethical, but that's the speculator's choice not the activity of speculation itself.

If speculators were not there willing to take the other side of the transaction when producers wanted to transfer risk how would they do it?

Contrast this with, say, a casino, where there is no transfer of risk, useful product, or productive activity other than facilitating transfer of wealth from clients to the casino - in fact, if this is not the case you get kicked out of the game, which generally doesn't happen with speculation.

Has your broker ever called you up and told you he'll close your account if you don't stop making money? Also with speculation, unlike a casino, you can have an office complete with clocks, and windows, but I'm not aware of any brokers who offer free drinks 24x7 when you open an account; maybe there's a missed marketing opportunity there... :-)

Paul

alp
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Post by alp » Mon Dec 22, 2008 7:07 pm

From the Yale University lecture, it sums it up to:
You will see what I mean by considering for a
moment the institution on which our whole economic
fabric rests, private property. There are certain
writers who believe the institution to be profoundly
immoral. The Frenchman Proudhon answered the
question "What is Property?" with the words
"Property is Robbery." What effective answer
is there to this criticism? Such an answer must of
course rest on the necessity of private property to

stimulate that effort and accumulation on which the
material welfare of society depends. We can all see
certain evil features in a system based on the private
pursuit of wealth by individual effort, but if we
are convinced that the important function of feed-
ing and clothing society is best performed by this
institution we cannot morally condemn it.

Similarly we must examine the economic func-
tion of the Stock Exchange if we wish to understand
its ethical nature. And, what is more, we must
examine it in the light of the system of private
property. That is why I referred to that funda-
mental institution at this point. One of the best
accounts of the Stock Market was written by that
very Proudhon who defined property as robbery.
The book may be read in two ways, first, that
under a system of private property the stock ex-
change is a necessity and hence justified, or,
secondj any system which makes the stock exchange
necessary is vile, hence the system of private prop-
erty is condemned.
Systematic speculation can only be considered immoral if we consider private property to be immoral too.

It's interesting that the lecture given 99 years ago seems so applicable to today's "high moral standards". Generally we are under the impression that in those old days things were better, trend following used to work, etc.

alp
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Post by alp » Mon Dec 22, 2008 7:16 pm

Paul King wrote:If speculators were not there willing to take the other side of the transaction when producers wanted to transfer risk how would they do it?
Moreover, I don't have the statistics, but if we consider all of the speculators participating in the markets, I guess the majority is mostly actually taking and realizing risks rather than making money consistently over the long run.

The crowd usually associates the word "speculator" to someone very intelligent or smart, capable of calling the next move and making a lot of money. That's why we usually hear in the news how a given instrument had a retracement because of "profit taking".

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What about insurance companies? Banks?

Post by drm7 » Tue Dec 23, 2008 3:24 pm

My day job has one leg in the securities industry and the other in the insurance industry, both of which take a lot of heat for "not making anything" or "pushing paper."

Insurance companies basically write options against the value of your car/home/life etc. By purchasing the option you are making a bet that you will wreck your car/die, etc. Does that mean you are gambling?

While speculators usually don't own the underlying asset (which is why they take a lot of heat) they assume the risk of loss from the owner of the asset, which allows the owner to have some flexbility around how he uses it. Scalpers provide liquidity to longer-term investors. I realize that Warren Buffett doesn't care if the stock market shuts down for five years, but some retiree in Boca sure wants it, and speculators are there to give it to him.

Part of the panic in the general markets was a liquidity problem - all of the "unproductive" speculators basically went on strike, which meant the cost of risk and liquidity went through the roof.

You should move to the Florida coast and see what its like to have nobody offer you an insurance quote on your house. Likewise, I'm sure the owners of all of those auction rate securities are praying for a "speculator" to come along and make an offer - any offer - for them.

I'm not saying that rampant, unbridled speculation isn't unproductive - I'm sure all of those house-flippers in California should have been spending their time looking for a cancer cure - but speculators grease the wheels of capitalism.

ES
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WORK NOT REQUIRED?

Post by ES » Tue Dec 23, 2008 5:43 pm

don't think for a minute that this business entails little work. there is constant research and there is no such item as the holy grail trading system.

just plug in you laptop and make money. I don't think so.

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Re: What about insurance companies? Banks?

Post by alp » Tue Dec 23, 2008 5:49 pm

drm7 wrote:I'm not saying that rampant, unbridled speculation isn't unproductive - I'm sure all of those house-flippers in California should have been spending their time looking for a cancer cure - but speculators grease the wheels of capitalism.
Perhaps the house-flipping market is just not liquid enough, i.e., there are not many players. But then, if they are "recycling" houses, what's the deal? It looks like a good service for the community and the environment.

It looks like this house-flipper has a "system": http://www.gmtoday.com/content/m_west/2 ... 08_p83.asp

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Post by Horizon21786 » Tue Jan 19, 2010 1:55 pm

This is the section that I find people often complain about:

"In the case of the stock exchange,
however, a man may be at once the guiding manager
of a corporation and a speculator in its securities.
In this case he has a divided interest, his duty to
his stockholders and his desire to make stock-jobbing
profits. His obvious duty is to manage the prop-
erty as well as he knows how and to be scrupulous
that the stockholders get the benefit of his manage-
ment. He may choose instead to manage it in such
a way as to make the price fluctuate wildly, and
under his control, while making big personal profits
on the exchange from his knowledge of what he
is going to do. There have been cases where a
corporation president has wantonly wrecked a great
enterprise, and thereby ruined or crippled thousands
of stockholders because he was short of the stock of
his own company. This is about the most dastardly
form of dishonesty known to man. Compared with
such a manipulator a safe-breaker is a respectable
and courageous citizen. Such men are rare, and
no one had a good word to say for them. But there
are other great managers who, while building up
the property they control, use the speculative
market as a means of securing for their own pockets
the gains that should go to the stockholders. ….Sup-
pose a man keeps secret the results of his own
management, covers up the increased earnings, and
is thus enabled to secure at low prices the stock
of many shareholders. Then when he is ready for
the coup, he reveals the conditions, declares a big
dividend, and on the great rise on price sells out
again at high profits. He has not caused any posi-
tive loss; he has built up instead of tearing down;
but he has none the less, by the devious use of the
stock market, put into his own pocket the increased
value, which morally belonged to the owners of
the property. This may be high finance and some
people admire it, but it is contrary not only to morals,
but to the simplest legal principles of trusteeship.
The moment a company director speculates in his
own shares, he is in grave moral danger and legal
danger as well. His business is to make money for
his stockholders and not for himself
. "

Directors have large share packages given to them and this causes a conflict of interest. Most workers believe that a Directors' priority should be to the company and its workers but 'market forces' believe the Directors priority is to the shareholders.
Consequently you will get lots of angry people in the UK because Cadbury's has been bought out by Kraft. I find a lot of people blame the stock market for the continuous pressures it puts on a company to continually grow and generate dividends / Profit - over and above the general health of the company.
Companies like the original Rolls Royce can no longer exist - a company that created few, elites and well build cars- who didn't aspire for continual growth. They took pride in what was produced. Since it has been bought out this is no longer the case..
I find people in the UK streets see the stock market as evil because Directors are prioritising perceived perpetual growth (People outside of Wall Street of course).
My uncle used to work for Nestle and I remember him saying - they expect us to grow and do better next year, but how much chocolate do they think people can eat (yes he always brought the chocolate at Christmas)
I find the French are looking toward Germany as a good system because their companies are ran differently. They tend to be owned by the employers.
I know a few friends who blame the stock market for the fact that their directors are making non business wise decisions to 'look' good on the stock market. Making pay cuts 'because of the recession', yet showing 7% growth on the stock market. Decision that make you look good on the stock market for share holders but which annoy the brains of the companies - the engineers in this case who are core to the development of future product development..

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Post by Horizon21786 » Tue Jan 19, 2010 2:08 pm

Also thought I should mentioned, went looking at the morality of trading, it is also interesting to consider the history of money.

If you haven't seen the show or read the book, "The Ascent of Money" by Niall Ferguson is really interesting. You can find the whole series on youtube.

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Post by Algonquin » Mon Jan 25, 2010 9:03 pm

Trading is as moral or ethical as digging a ditch. It depends on why you are digging the ditch.

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Post by Moto moto » Wed Jan 27, 2010 3:55 am

I am going to dig a ditch to catch a banker. I hear these wild animals have a secret pot of gold that if you tickle their stomach they will give up in an instant.
Is this ethical?

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Post by sr100m » Tue Feb 16, 2010 4:04 am

Quote from Tom Basso from a recent van tharp newsletter -

Value of Trading to Society

A Follow up by Tom Basso

Van,

Regarding the question on the value of trading to society [in the newsletter a couple of weeks ago], I would cite a study I did long ago showing hedgers laying off risk to speculators that would, by taking positions, take the risk off the hedging community. For the risk the speculator takes on, he or she is paid a reasonable profit over time. The hedging community pays a price for reducing their risk and that is earned by the speculators. Without the traders of the world, the market for hedging would sometimes be one sided and illiquid, and their cost to lay off risk would increase. Businesses would be more affected by market swings and planning would be difficult.

Then, there's the money manger aspect, which I was for 28 years. Being a trader with other peoples' money means trying to add value to their net worth, so they can send their kids to college, afford retirement, etc. Most of my clients appreciated what I did for them.

All the best,

Tom Basso

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Post by RedRock » Tue Feb 16, 2010 11:43 am

I share Mr Bassos' position.

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Post by sluggo » Tue Feb 16, 2010 1:39 pm

"Mr Basso's position" is the same as the regulators' position. The NFA's introductory pamphlet (Link) says:
Other futures market participants are speculative investors who accept the price risks that hedgers seek to avoid. Most speculators have no intention of making or taking delivery of the commodity. They seek instead to profit from a change in the price. That is, they buy when they anticipate rising prices and sell when they anticipate declining prices. The interaction of hedgers and speculators helps to provide active, liquid and competitive markets.
Study guides for the NFA exam put it this way:
A speculator is an individual who buys a commodity if he anticipates a price rise or sells a commodity if he anticipates a price decrease. The speculator, by buying and selling futures contracts in the hope of making a profit, will accept the price risk due to a price change that the producer or user of the cash commodity is trying to avoid. The producer or user, by hedging his cash position through a purchase or sale of futures, thereby transfers his risk to the speculator.

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Post by RedRock » Tue Feb 16, 2010 2:10 pm

ahh - yes. So we are not without value and moral standing to and within society. Long live those who accept, and perhaps even manage, risk... The excesses from our larger institutional brethren would be the cause of negative public perception towards the 'evil' speculators. That and the 'pain' felt at the fuel pump... Its the sensational/biased/ or merely misinformed journalism which is remembered by many. Not the rational evidence demonstrating the function and price neutral nature of speculative activities. 'Folks', seem to like having someone else to blame for their condition. So long as we are left basically free to pursue our business'. I could really give a xxxx about the perceptions. I'm usually rather vague when asked what I 'do', thus avoiding the conversation entirely.

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Post by LeviF » Tue Feb 16, 2010 2:16 pm

RedRock wrote:I'm usually rather vague when asked what I 'do', thus avoiding the conversation entirely.
Ha! Like "I'm in the import/export business"

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Post by rabidric » Thu Jun 10, 2010 5:39 am

At dinner parties, it usually goes down better if i tell people i'm a professional paedophile instead of what i really do for a living.... :roll:

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Post by Slipstream » Fri Jul 23, 2010 12:49 pm

Laughing at telling people you're a pedophile... I can relate to the situation.

At dinner parties or whatever I usually just say I am interested in personal freedom and that is the last honest profession that I could find that allows me the greatest amount of freedom. This usually causes them to reflect a bit...

When pressed I call upon my Trading "Guru" Epictetus, one of the greatest finds of my adult life: simple, clear, and reliable as a moral and personal guide to all sorts of things, including trading.



Slipstream

A reasonable happy Drummond Geometry trader

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Post by RedRock » Fri Jul 23, 2010 1:06 pm

Slipstream wrote:
When pressed I call upon my Trading "Guru" Epictetus, one of the greatest finds of my adult life: simple, clear, and reliable as a moral and personal guide to all sorts of things, including trading.
Ayn Rand, was my "epictetus".

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