Speculation

There are many types of people who buy and sell securities. The most fundamental division is between speculators and investors. Simply put investors are people who think a particular enterprise will be successful and buy a security with the hope of long term growth. Speculators are focused on price movements and may or may not even consider the financial status of a company, but hope to profit from being right about how prices will change over some period of time.

Now I'm sure there are many who have alternate definitions, but I believe mine is simple and accurate. Generally, investor are fundamentalists, meaning they worry about things like balance sheets, cash flow, earnings, etc. Speculators may look at these things, but generally they are much more interested in short term trends and are interested in fundamentals only to the extent that they may impact price movements.

Speculation is generally criticised but speculators do serve a purpose similar to insurance in the marketplace. For example, speculators allow suppliers to hedge production costs. Without them the risks in business costs could be much less predictable. However, if you are a speculator, you are clearly taking significant risk, since the risk is transferred to the speculator and human nature leads speculators to look for ways to reduce that risk.

Similar to gambling, speculators are constantly searching for a "sure thing". Now, the only real way to have a sure thing is to be able to control the outcome. This is where speculation becomes problematic. In some markets opportunities arise for speculators to control the way prices move over a period of time. In the oil markets, there is significant belief that the price rise of 2008 was simply speculation created. More recently we had a situation where an individual trader was able to move oil futures on the overnight market and then pocket some profits on the reversals.

So is a situation where markets can be "fixed" even if only for short periods of time acceptable? I think most people would object to this as much as they would object to sporting events being fixed for the benefit of gamblers. The problem is that we have a lot of money and a lot of greed in play in speculation and regulators are unlikely to find a way to prevent the next "gimmick".

This doesn't mean they should stop trying.

One of the first things they can do is reign in naked short selling, where the number of shares being sold can be artificially increased. Making sellers identify the specific shares they are selling and reinstitution of the uptick rule are excellent steps that should be implemented quickly.