Morality of Publicly Traded Markets - Essay Example

Morality and Publicly Traded Markets The meaning explained by the term ‘financial markets’ is very broad. It covers various forms of markets such as,asset market, money market, bond market and equity market. There are also other forms of markets, namely, “future markets, options markets, securities markets and market for interbank loans” (Mizen 1). The volumes of these markets and their roles have been altered significantly in the latter years of the twentieth century. The financial markets regularly deal with capital worth billions of dollars. The financial market has grown significantly as a generic group in the last few decades. Out of the many institutions, some centers have developed specialized organizations within themselves that deal particularly with the form of the market that they have specialized in. This paper deals with the issue of morality in regard to financial markets and investigates into the role played by the different forms of modern tools of trade in bringing more profit to stock traders. Although there are several factors responsible for the huge growth of the financial markets, two main factors can be identified. These factors are new financial instruments and technological innovation. These are elaborated below: New financial instruments New financial instruments have been devised, which have increased the availability of choice to the customers. They now have greater options to choose from in structure of assets and currency of denomination. Financial instruments have no real world counterpart. But these have been developed and customized in such a way that trade in financial instruments have outshone trade in other instruments. After the existence of derivatives has come to the notice of the common man, the operations conducted in these financial instruments have magnified. Alongside transactions in other kinds of assets have also accelerated. Traders in some regions are specialized in these ‘pure’ markets; they make very little or almost no transactions in tangible assets or other real commodities (Mizen 1). There is a myth surrounding money supply which often ends up in chaos. The financial press keeps a close watch on money supply by the Fed but the results are often interpreted in a chaotic manner. Very often when there is increase in money supply by the Fed it is interpreted as decrease in interest rates and inflation, but at the same time a contrasting interpretation is made that increase in money supply reduces the interest rates. The same thing happens when the Fed decreases the money supply. It is sometimes interpreted as lowering of interest rates and other times reduction of interest rates. However, the actual scenario is quite different. Just like in the case of price level, the level of interest rates is also dependant on different variable factors and in different directions. When the Fed increases money supply, simultaneously it happens that reserves in banks are also increased, which in turn rises credit supply and bank deposits. Such high generation of loans means banks are lending more to the market, and this inevitably lowers the price of credit which means interest rates fall. Similarly, if the Fed holds back supply of money then bank loan decreases in the market which rises the price of credit thereby increasing rate of interest (Rothbard, 11-12). Computer technology The rise of computer technology could be felt many years back in 1986. Technological enhancement has led to the well known Big Bang in the stock market of London and is later matched with similar incidents in the trade centers based in Paris, Madrid and Germany. Trade in financial instruments have been both facilitated and inspired by such innovations. Huge volumes of data can be reduced to small volumes of records saved in computers with the help of modern technology. This eliminates the barriers of place and time. Trading across geographical borders has become easier and can be conducted within very short periods of time. This has made trade in financial markets more diverse as well as intense. With the inclusion of computers in the process of trading, pre-programmed rules of trade can be operated that allows huge volumes of trade to take place at an increasing rate. However, every good has its own bad. Reduction of manual involvement in the trading process brings volatility in the financial market. When exchange rates have become volatile, it becomes a difficult task for the importing and exporting firms to make reliable predictions about the rates of exchange for the future to make negotiation in long term contracts, for example in the investment of the real estate industry. Computerization creates adversities for those that trade in this sector normally. Management of risk becomes an important concern for the firms in this environment (Mizen 1). Millisecond computer trading Stock markets are a contemporary example of computer trading. Computer trading is the phenomenon in which markets are monitored with the help of computers and bids are made automatically. Trading activities in such a market occur at much higher frequency than it used to happen when everything was done manually. According to some studies, around fifty to seventy five percent of the total volume of trading in the financial market is estimated to be driven by computer trading on a particular day (Margeti 176). The speed has increased so much that activities take place at a rate of “faster than the difference in access times” (Holenstein, Highleyman & Holenstein 183). It only takes a few milliseconds for the computers to perform these trading activities. This makes the situation more complex and critical than when manual operations take place in the financial markets. When the competing bidders interface to the markets by way of their keyboards, those people that have a more high speed internet connection can bid quicker than the ones with slower internet connections. Thus the use of modern technology plays a part in the game giving unfair advantage to those that have better access to technology. A fraction of a second, or a few milliseconds might prove to be of tremendous financial value and become crucial to the decision and fate of a trader. The ability to make good bids takes a back seat when brought in competition with highly technical computer programs. There is an ethical side to it. Millisecond computing is a new method offered by the progressions in technology. It is a method that a small number of traders can make use of due to their advantageous position and master the entire stock market. They can peek at investors’ decisions and even manipulate the prices of shares released in the market. This kind of trading is termed as “high frequency trading” (United States Congressional Record: Vol.155 19509). This practice has become one of the most popular topics of discussion in recent times and is also considered mysteries in the activities of the financial market. It can transmit millions of orders with lightning speed thereby reaping billions of dollars at the expense of some other lesser advantageous speculators. In floor trading, considerable amount of human intervention is required and experience of the traders cast an important impact on the activities and outcomes in this market. But with e-trade the situation has changed. Participants in the trading remain anonymous. The computer matches all orders, and no human intervention is necessary. Here the necessity is to become accustomed with the mechanisms of electronic trading. Traders that have better access to modern technologies therefore achieve utmost gains (Zimmermann 223). The concerning factor is the speed that comes with millisecond computing. It has taken the form of “a technological arms race” (United States Congressional Record: Vol.155 19509) the only point of departure between the winners and the losers is the speed with which they can move. The other side of this advantage is that it prevents other people from investing in the stock market. The financial markets become dominated by the few powerful ones and the activities gradually get manipulated at their finger tips. This problem definitely bears strong link with legal and ethical issues. E-Trade E-trade is a new kind of electronic brokerage firm that has gained huge fame among its customers. It has leveraged technology to reduce cost of transaction both in back office and also in customer interface. In the year 2012 it charged $9.99 as stock fee per trade. It relies on electronic modes of order intake. This leads to lower cost of compensation per trade (Westland & Clark 375). It has very good investment options for its customers and offers them good banking services. Its experience, extensive research and trading tools, such as, investor resource centre, automated and active trading, online advisor, training on investment and trading, calculators, mobile trading options and few others, have propelled the firm to the highest position of the list of broking firms. It follows a clever marketing strategy. The trading options for E-trade include stocks, mutual funds, futures and bonds. Scottrade Scottrade is also a well established broking firm that has been in the financial market for more than thirty years. It does not charge any fees for large orders, account maintenance, account inactivity or after hours trading. This firm values customers’ satisfaction and keeps a low stock fee of $7 per transaction which is considerably lower than the other players (Krantz 103). It also has a low transaction fee for some other programs. Its trading options include stocks, ETFs, options and Mutual funds. Some of the trading tools offered by Scottrade are online advisor, automated and active trading, Mutual fund screener, training on investment and trading, mobile trading options, investor resource centre and few others. Financial markets and the question of morality The traders in the financial markets act with the objective of seeking rent and making profit. They are associated with the notions of greed as well as ‘immoral behavior’ in public conception. The protestant work ethics have a prominent effect in the formation of this concept. Protestant work ethics put that any work should be productive and returns must be proportionate to the effort applied to earn those returns. In this light the actions made in the trading of financial instruments are seen as ‘unproductive’. The primary action in this market is rent-seeking, which in effect does not involve work in real terms. There is no production involved in the process and the rates of return received to the trading partners are considered disproportionate to the efforts undertaken to make the transactions of assets in the financial market. The stock market constitutes a speculative fund and there is a supply of energetic people; many of whom are young. These people are in search of any opportunity that can be exploited for the cause of making a fortune. Therefore, in common public opinion, such activities are similar to the ones that are conducted in betting markets, and also have strong resemblance to gambling. In this setup the organizers emerge as gainers at the cost of the participants. Thus the question arises whether the stock and future markets are ethical. Mizen has also showcased another reason behind the fact that financial markets are considered to be speculative. The opinions and expectations of the traders act as drivers of the prices of the assets in the financial markets. Greed can be seen as new or greed can be seen as constant Greed is a very sensitive topic that has been depicted by politicians, economist and authors in different ways. There is constant debate on this issue. The devastating effects of greed are apparent from the recent financial crash in the United States. “Greed of financers, greed of investors” (Smelt) and greed to the consumers of the US are together held responsible for this phenomenon. Smelt has argued in his article that there exists a moral dimension beneath the severe financial havoc. It arises from “a weakness in the commutative justice that arises in the marketplace” (Smelt). It is even more severe than a lack of social justice or inefficiency of distribution; although these two factors are also a big concern to the activities of the financial markets. Issues related to trust and camaraderie are very important and any lack of these might invite a disorder in the distribution of welfare among the subjects of the economy and even worsen the situation. The moral questions that come up are generic, yet surprising for the policy makers. In a situation of financial meltdown, several broader principles come under the scanner and the issue of morality turns up in a critical way. E-trade and its impacts The term e-trade itself gives a hint towards the underlying meaning of this term. In the case of e-commerce or the more commonly understood term, e-mail, e-trade is associated with electronic methods of doing trade. This term has been coined in the 1990s and has become increasingly popular (Fromkin, Rodman & Hyams 502). Trading in stocks is all about anticipating and making valid predictions about the worth of assets in future. Thus the websites that deal in stock trading demand access to one of the most private information of the individual. They therefore have the responsibility to manifest trust among their users and improve their competence. They must make sure that it deals with the most relevant, quality information and distance themselves from the more speculative and low quality information (ETrade Inviting, But It Lacks Interactivity). This requires that the participants are treated specially by the sites and individual attributes are stored intelligently and responsibly. The heavy traders get special treatment from these sites. The kind of treatment differs according to the value of trade made by the customer. The heaviest traders are the valuable customers to the sites. The other occasional customers that make lesser amount of trading through these sites are differentiated from the valuable customers and considered “second-class citizens” (ETrade Inviting, But It Lacks Interactivity) in the world of stock markets. This problem is one of the causes behind unethical forms of trade in the financial markets. The situation can be improved if the occasional customers can be drawn more intently into this business. It can be made feasible by providing rewards to these customers intermittently. This would increase their interest towards trading. These rewards make maximum impact when they are “given out of “kindness”” (ETrade Inviting, But It Lacks Interactivity). Alternative Economic Perspectives Austrian-public choice approach to financial markets Regulation of any industry amounts to the specifications of assigning property rights upon the wealth which is generated by that particular industry. With restrictions on entry, the incumbent firms’ profit rises hugely while the scope to earn profit by the potential firms decline. In the stock market, the traders that are big players make large sums of profit, while at the cost of the small traders. The producer surplus of the sellers of shares increase and the consumer surplus of the buyers decrease. Deregulation of such restrictions to entry re-assigns the profits and makes a more moral distribution of profits in the economy. From the perspective of public choice, the allocation of these rights happens in accordance with the relative level of political strength of the particular interest group involved in the trading. These decisions are made by the regulator or legislator in the Austrian public choice theory of political economy. The Austrian approach to theory of public choice departs from the conventional theory. From the Austrian perspective, the regulator acts as an entrepreneur and is not a mere “budget- or surplus-maximizer as in conventional public choice models” (Boettke & Lopez 116). In the theory of public choice, the government is not viewed as “an instrument of ruling class” (Boettke & Lopez 111). It is considered a vehicle or a machine that helps the individual citizens to make their decisions and “choose to act in concert with one another for the purpose of producing collective goods” (Boettke & Lopez 111). It must be understood that in the process of making collective choice the individuals are not less self interested than when they make private individual choices. The economic way of making decisions emphasizes the validity of individual decision making processes in a range of social settings. Political agents use conventional behavioral assumptions made about individuals’ self-interest through the study of the economic agents. This has full consistency with the Austrian theory that promotes the “practice of viewing social wholes (such as national economies) as the product of individual actions” (Boettke & Lopez 111). Both public choice economists and the supporters of market theory start with the process of methodological individualism. The public choice theory was developed in confrontation with the “public interest theories of government policy-making”. However, the Austrian theorists differ from the public choice economists in regard to the role played by access to information in the economy. According to the public choice economists all political agents, including voters, politicians and bureaucrats act under perfect information in compliance with their own interests. However, Austrian political economists challenges this omniscient assumption. A combined approach of Austrian public choice theory relaxes both these assumptions. It is a hybrid market process which is much realistic and entertains the complicacies of the modern day financial markets. As we have already discussed, in the present day scenario, although transfer of knowledge and information has become easier and cost less than in the past, it has not yet become accessible to the individuals in all levels of the society. Hence the assumptions of perfect information is correct in accordance with the smooth flow of information in modern times, but is challenged by the class of people whose interests are hampered due to this phenomenon. It facilitates only a fraction of the society to a large extent. Redundancy of government intervention Access to and possession of perfect information has been a turning point in the market for financial assets. An assumption of the liberal approach to market economy is that every economic agent is rational and makes a rational choice in any situation. The phenomenon of possessing all required information through extensive knowledge is centered over the use of internet (King et al 839). This has created a conjecture “against government intervention in markets” (King et al 839). It favors a small government and lesser tax rates. One development over and above the neo-classical foundation of liberal economics is that ‘efficient market hypothesis’; it is the fundamental doctrine of market liberalism, which replaced Keynes theory of neo classical economics. According to this new foundation, possibly the best “guide to the value of economic assets” (King et al. 839) is the financial market that operates freely without any intervention by any outside forces. Market price of any financial asset is set after taking into consideration all of the information available and is the best estimate of the value of that asset. Therefore these markets are the best place to make decisions about investment. In very simple terms, movement of the prices of financial assets, like shares, cannot be forecasted from its movements in the past. Movement of share prices follows a random pattern that is affected by any incident, good or bad, that comes along in the future. Although the neo-classical economics was not popular with politicians, it was successful in creating a general opinion that the less intervention by the government, the better it is for the economy. The principal argument against monetary policy is that such policies create a substantial lag in the economy which affects the economy adversely. Monetary policy changes the prevailing rates of interest in the economy. This in turn affects investment spending. In this context it must be noted that monetary policy changes take a long time, at the least six months, to influence output and employment; but investment plans are made by most firms in advance to the actual expenditure. Once the decisions are made, it becomes costly to change those decisions at the awake of a changed set of policies. Otherwise the plans, if executed yield lesser results than expected owing to the changes in rates of interest. While the policies take a long time to come into effect they last for more than a few years. Ecological issues with the investment climate Some contemporary social scientists share the same ground with Adam Smith on the topic of managing the investment of resources from the perspective of evolution of the society. Individual behavior can be contributing to the constructive institutional arrangements in the society. It would help in avoiding damaging market excesses. Smith’s work addresses the relevant environmental issues that arise in the present day market scenario (Whittaker 33). According to the philosophy of Adam smith, civic ethics can mature. Maturation implies a closer approximation and appreciation of ethical ideas keeping consistency with the liberal order. Justice is the crucial pillar upon which the society stands. All members of the society are tied to the common center of mutual goods (Evensky 119). Although all individuals does not necessarily need to provide assistance to the others out of disinterested motives, a society in which the members are constantly set at hurting others and gaining from the loss of other individuals cannot survive for long. The personality characteristics are an important factor in investment decisions (Wärneryd 257). When faced with uncertainty people tend to get adjusted to the situation and the environment. In this context, the concept of ‘ecological rationality’ often finds mention. Ecological rationality is built on the complex details of the real world. Besides cooperation among citizens, the same is required from the financial institutions and supervisory agencies on the stock market. It is necessary that all information, such as annual reports of the stock broking firms, should be accessible to public free of cost to promote trust among the people ensure justice to all through collective decision making (Group of Green Economists 56-57). However, in modern days this access to information has become heterogeneous among the population which is causing a concern about the fulfillment of the objective of justice. Herbalife’s pyramid scheme claim In the recent Herbalife battle between the Pershing Square Manager William Ackman and Icahn Enterprise Chairman Carl Icahn, the investors in Pershing square are faced with a rough time as Ackman enters into a public feud with the legendary billionaire trader Icahn (Billionaire Showdown: Bill Ackman vs. Carl Icahn (Full interview)). While Ackman continues to keep faith that “Herbalife is a pyramid scheme” (Ro), and is having a huge “short position against the stock” (Ro), Herbalife shares are facing a surge. Ackman has argued that Herbalife is about signing up new distributors and not about selling its products in the market. The Herbalife CEO has strongly disagreed to this ‘pyramid scheme’ (Goldstein). However, Ackman’s position in Wall Street has brought about concern for the stake of the company. Adam Smith on morality For a proper analyze of economics, the foremost thing required is to carefully study the policies applied, make reasonable predictions regarding their potential consequences and to study the current economic situation. Without these, it is not possible to gauge the value of economics under any kind of value system. However, the core problem herein is that economists more often than not ignore the moral aspect of economic analysis, rather they do not comprehend the moral values attached to economics. Without taking a moral approach towards economics, it is natural that economists garner limited knowledge of the economic conditions and therefore fail to express efficiently whatever they understand. Moreover, when economists fail to understand the moral value attached to economics, it means others grab this field to make endless comments on morality in economics in general, and on the market values more specifically, that are as “logically appalling as they are publicly appealing.” (Clark & Lee, 1) What is absolutely needed here is to integrate moral discourse with positive economics and only then the economists can effectively defend conditions in the market and establish the virtues of the market arrangements. In this way markets can also be protected against the so called moral advocators among politicians who justify policies that contribute more towards protecting their politically favored groups than abiding by the ethics of market competition (Clark & Lee, 2). Radical approach During 1989, the economic process was going through a sweeping reform, and there was a common perspective among the economists about the way economic progress should take place. The first consensus was that all economic elements should be free from government intervention which means there should be market liberalization. This should be accompanied by a stabilizing factor for market based on “tight money and the hardening of budget constraints.” (Murrell, 79) The first step towards this kind of reform is that both private and public sectors should perform under a common set of conditions. Thus, greater dependence on market structure would lead to annihilation of traditional control of “planners and supply organizations.” Also, it was decided that government would be given total control over state assets by removing the law of property rights in the state sector. This measure was adopted to pave the way for privatization. Thus, this common 1989 perspective of economists is the radical approach and it “emphasizes speed, destruction of the old, and quick conversion of organizations to the arrangements of developed capitalist economies.” (Murrell, 79-80) Conclusion Investment decisions of investors are affected by two crucial factors; personality or psychology and financial condition of the market. Investors, while making investment decisions, bring something more than just money to stock markets. A wide variety of stocks are available in the market ranging between aggressive to conservative investments. Personal tolerance towards risk and time are the key factors that regain importance in this context (Fontanills & Gentile 79). The more the trading organizations are willing to respond to pressure, the quicker would be the implementation and execution of e-trade. This shows that a shift towards electronic ways of trading in financial markets calls for even more electronic trading. The increasing importance of the institutional customers and the magnitude of weight they put on speed of operations finally makes the impact of speed rise (Zimmermann 136-138). With this, the moral dimension arises. The shape in which the issue of morality is addressed is decisive and becomes a “part of the problem and part of the solution” (Smelt). The battle over Herbalife’s shares between the billionaire investors puts a big impact on the investment mentality of the people. The fact addressed here is that there are smaller traders that invest in financial assets who run on the margin, while the bigger players reap the profits. Works Cited Boettke, Peter J. & Lopez, Edward J. “Austrian Economics and Public Choice.” The Review of Austrian Economics 15.2/3 (2002): 111–119, Online. Billionnaire Showdown: Bill Ackman vs. Carl Icahn (Full interview), January 25 2013. Web. 24 Feb. 2013. Clark, J.R. & Dwight R. Lee “Markets and Morality”, Cato Journal, 31.1 (2011) 1-25. 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