Straying Markets

The extent to which financial markets have evolved and the types of trading instruments available has strayed far from the fundamentals of markets in my opinion. Traditionally and fundamentally, a market should allow participants to barter, bargain and strike a deal to trade a tangible asset and the strike price should closely reflect the value of the asset as it is related to the infinite circumstances surrounding the participants. However, in modern day financial markets, I believe trading instruments have strayed significantly from the fundamentals in the name of innovation. The degree of abstraction of many of the derivatives used in modern financial markets away from the real asset has introduced participants and behaviours that undermine the trading process of real assets.

I believe therefore that the move by Germany to ban "naked short-selling" is a step in the right direction to returning financial markets to its fundamental principles. In "naked short-selling", an asset is sold without owning, borrowing or even ensuring that the asset can be borrowed to fulfil the sale. How can a market participant trading an asset that he/she does not own or intend to own be acting in the interest of the real asset? I believe that a participant acting in the interest of the abstraction of an asset can never be interested in the real asset and therefore can never be working in the interest of the market or an economy. Such abstraction of the real underlying asset means that the factors influencing the decisions are not properly correlated to the real asset since the psychology of these participants interested in trading an abstraction of the asset are likely to be different to participants who have an interest in the real underlying asset.

The abstracted derivatives in the US housing market proved to be the fundamental cause of the bust by introducing risk that was impossible to measure and manage. Financial markets must be returned to operation on the basis of the principle of trading real assets.