Defining Speculation: The First Step toward a
Rational Dialogue

Abstract

The meaning attributed to a particular financial term can have a significant impact on the way one considers issues in the marketplace. The purpose of this article is to offer one perspective on how to properly define speculation and to offer a broad view of how and why different understandings of the term have led to the debate as to how, and to what degree, to control the activities of speculators. For instance, the view of what constitutes speculation and its impact on market processes varies widely among academics, politicians, the media, and the general public. Academics generally view speculators as a group of individuals who trade primarily based on an individual asset’s standalone, expected risk–reward trade-off. In contrast, in the public, the mass media, and the political arena, speculators are often considered less important or less noble than other market participants who trade financial futures or commodities only as an indirect (e.g.,hedging) part of their ordinary business activities. Whatever the separation between hedging and speculation, the primary concern is the degree to which either hedgers or speculators have direct influence on market prices above and beyond their primary market functions.

TOPICS: Exchanges/markets/clearinghouses, in markets, commodities, futures and forward contracts