Friday, July 15, 2011

The Contour Becomes Visible ...

I formulated the Theory of Speculative Capital in 1998. An Internet search — I think even Google was around then — registered zero hits for the phrase “speculative capital”. There were several “speculative capital flows”, in which the flows were described as speculative, but nothing for speculative capital as a noun.

The gist of the theory is that speculative capital is a self-destructive force which rises to dominate the financial markets and, in doing so, sows the seeds of their destruction. If you get that, you too, could be a man with a crystal ball.
Like all forces, speculative capital assumes many forms; hedge funds (organizational/legal form), derivatives(functional form) and, lately, capital engaged in high-frequency trading, are its various manifestations.  If you read the 9-part series on the subject, you know how this latest form came about.

Each new form of speculative capital is more aggressive and thus, more intense and extreme than the previous forms. It has to be: with the low hanging fruits taken, only the progressively more difficult-to-spot-and-exploit opportunities remain. Gradually, the tension and the prevalence of tension gets noticed, noticed being a different matter from understood.
Today, the Financial Times had a relatively long article on how HFT is “hitting headwinds”. The article’s “pull quote”, presumably the most insightful thought in it, was the comment of a Karim Taleb that: “HFT is cannibalizing itself, since it is driving out the very traders it needs to feed off”.
Exactly. But then, either Karim or the paper added that “In response, most traders are already turning to other strategies less dependent on speed.”
I am afraid that will not work. Even in strategies less dependent on speed, it is important to get there first. Being first counts for something!

What will happen, I think, is that the strategies less dependent on speed will gradually become more dependent on it until they all become totally dependent on speed, just like the equities markets are now. That is how speculative capital changes the markets and sets them up for destruction: by radically altering their structure, i.e., the way they operate.

A system’s modus operandi, the way it works, is designed around its purpose - what it is for. The two are inseparable. Destroying one destroys the other.

When speculative capital destroys, there is no malice or conspiracy. It is just the way it works, the way it is, which is why the destruction goes not only unrecognized but is applauded as continued advancement towards some financial/economic promised land.

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