13 July 2005

The Web

Gremlins on the stock exchange

The four bomb attacks in London on Thursday morning 7 July 2004 sparked off the ‘natural’ selling panic on the European stock exchanges at their opening time. If the markets in the Far East and USA hadn’t been closed, they would have gone through the same experience.
Over 4% was wiped off the equities’ value in the immediate aftermath right up to mid-day, but a partial rebound did occur during the afternoon, continuing in the morrow’s (Friday) session such that most of the panic-losses were erased by the close of business for that week. Normality returned : nearly all damage was repaired and losses recouped.
Really? Certainly not for the thousands of ‘small guys’ who fell victim to the malicious manoeuvrings of a few speculators - the ‘illegitimate’ ones, of course, those despicable ‘gremlins’ who manage so well to disguise their identities, but whose actions are clearly felt by all legitimate dealers on the exchanges. Incessantly, the authorities conduct a war on them. Yet, like drug barons, they are hard to detect and even harder to prove their illegitimacy when suspected.
Speculation as such is not condemned. Indeed, it claims a salutary influence on the oscillation of share prices by tempering volatility and, consequently, smoothing otherwise excessive fluctuations in both directions. Many investors are familiar with the ‘zoo’ terminology of the exchanges - whereas ‘bulls’ and ‘bears’ , for instance, are accepted, even encouraged, ‘stags’ are not.
These are speculators in the legitimate sense and have a useful role to play. Certainly, they are not gamblers. Acting independently of, indeed in competition with, each other, they undertake well-studied scientifically-analysed exercises on which eventually they form views on the current market value of individual corporate stocks and shares. They endeavour to identify those which, they believe, are grossly over- or under-valued by the market. They act on their views by selling or buying respectively in small or not-so-small volumes, but never large enough to cause any immediate, substantial and perceptible effect on the particular share’s price. They may possibly cause a ripple, if a number of speculators accidentally, though rarely, act simultaneously and in the same direction.
The market for that stock is then described by commentators or brokers as ‘bullish’ or ‘bearish’ depending on whether the speculators, and possibly also others, are busy buying or selling. Sentiment then tends to take over with brokers advising clients accordingly. At some point, generally days or weeks later, the speculators act in the opposite direction by loading/unloading their previous buying/selling at a profit, or at a loss if their perception happens to have been founded on wrong assumptions.
Oh yes, speculators do incur losses. Quite often, too. Sometimes, but rarely, even overall losses over a longish period which can throw them out of business. Nevertheless, experience has shown that in the big majority of cases, winnings exceed losses. This phenomenon is precisely what distinguishes them from casino gamblers.
Their legitimacy lies in the fact that they manage to buck a trendy movement which none of them would have brought about by themselves anyway. By selling (hopefully at a profit) shares which they had bought previously at a lower price plus charges, they arrest a hike which could get out of hand. The opposite happens when they buy back. The movements graph is thus narrowed in its bands: a good thing for the long-term investor and for the corporations themselves.
What happened on Thursday 7/7, however, was entirely different. Another type of speculator sprang on the scene as soon as the news broke of the London bombings - vicious and invisible, yet almost palpable. It is from a past personal experience of a similar episode in 1963 that I can surmise what probably did take place on 7/7/05.
In November 1963 I was researching at LSE (London Stock Exchange) for my studies in business finance at another LSE ( London School of Economics). My interview with a leading stock jobber could only take place after the exchange’s closing time, late afternoon. This was years before Big Bang which, inter alia, ended the distinction between the two classes of members of the LSE: the jobbers and the brokers. I must say how exceptionally helpful everyone in the City was with foreign students who researched in finance. There must have been hundreds; nobody was turned down. I wonder if it’s the same today, knowing as I do how Britain has changed since my student days!
Suddenly my interviewee turned white: news broke that President Kennedy had just been assassinated. Understandably, the shock brought the interview to an abrupt end. But not before he told me to watch out for the morrow’s markets’ reaction in the wake of New York’s which reported a heavy impact. “Prof. Paish will explain better the crazy behaviour of investors here when the market re-opens tomorrow. The ‘gremlins’ will be busy at work all evening, fanning the inevitable panic in the tabloid press. They will be the first to sell selected sensitive shares before their prices start tumbling: even shares they don’t possess! They know they will re-buy them cheaply before Settlement Day, balance their account with us jobbers and bag their profits. There is nothing much my boss can do except possibly widening the ‘turn’ to mitigate the impact. It is his duty as a jobber to ensure there is always a market in a particular share unless the authorities suspend dealings, which is a rarity. Identifying the ‘gremlins’ is nigh impossible.”
He was bang on target. It took some days before the havoc ‘normalised’ (?) as the speculators, slowly and imperceptibly, started their buying spree, causing extensive financial losses among the genuine investors who would not have gone to the market but for the panic. The corporations themselves suffered long-term ‘psychological’ damage in the perception of their existing and potential members.
Happily, 7/7 hasn’t been that bad. The markets recovered rather quickly, I would say. Still, during those few hours millions of pounds/euros must have been pocketed by the obnoxious speculators at the expense of thousands of small investors all over Europe.
It certainly was not a “pause for breath” just because the markets had been experiencing long-overdue gains for some days before. I believe that such a ‘pause’ was solely for the enrichment of the illegitimate speculators. They should not be allowed this privilege. The exchanges should have been closed forthwith, at least for that day.

Karm Farrugia is an economist

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