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    December 2012
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    Canada Needs a National Stock Market Securities Regulator?

    Mark Borkowski

    How should we deal with Market Speculators?

    The stock markets of the world are connected and operate on a 24-hour basis through an elaborate electronic network that transacts all the time, enough to finance the entire annual volume of world trade.

    Finance has taken on a life of its own, completely divorced from trade and production. It moves freely across borders at lightening speed bringing together remote New Zealand villages with financial wizards on Wall Street or in Tokyo.

    In one of William Faulkner’s great novels he describes a scene in a small Mississippi town from the 1920’s, where small time speculators with the aid of the rapid communications allowed by the telegraph, speculate on cotton futures on the Chicago Commodity Exchange. The technical innovation has allowed big changes in the organization of commodities markets. Financial markets became national institutions, rather than local. National rules and regulations were developed to help these markets to function smoothly, and to prevent unscrupulous trades from exploiting weakness.

    Canada needs a truly national regulator for the Securities Industry. Why are Canadian politicians not able to get their act together and finalize the legislation to make it happen? This issue has been discussed for over a decade.

    The explosion of computerization and automation of the financial markets has, in like manner, brought about huge changes to these markets. The ability of computers to process incomprehensible amounts of data at very rapid rates has brought about a very large increase in the volume of trading, and acceleration in the rate at which assets are turned over.

    The connection of computers to advanced communication technology has led to the development of a world market. Markets are now even more global and open continuously. But while the development of national markets lead to national regulation, the development of international markets has not yet lead to adequate international regulation.

    Due to these huge numbers of foreign exchange transactions, an explosive growth in speculation in international currency the markets are traced to de-regulation in financial markets, and the prevailing system of floating (market determined) exchange rates.

    China has been immune from the system. It has massive inherent benefits built into its currency and system. This will not last for long. It is impossible for a country to support a currency that should have a free float. When it comes soon, the world and China will be a different place.

    Today, no country is immune from the speculators. Their reach is very pervasive. No economy like the US has experienced as much pressure on its currency by speculators. There is so much trade in the US currency that the estimate runs to three trillion dollars per business day.

    Not all currency trades are speculators. There are three classes of traders in exchange markets, legitimate importers & exporters, bona a fide investors, and speculators. It is easy to understand the motives of importers and exporters and even investors, but what motivates speculators?

    What speculators do is gamble on future price movements. But they are so many that their actions now dominate the market. Acting on herd instinct, well known for stampedes and bubbles, their speculations become reality. Prices of currencies are no longer reflective of cost or preferential differentials, or other relevant economic conditions, but rather mirrors of the fancies of the currency speculators.

    Reacting to rumours or a surge of adrenaline, these people can change the fate of a currency and with it the economic well being of millions of people. Recent research has demonstrated that financial markets usually over react to any new information. Over reacting means that price fluctuation will be larger than warranted by economic conditions.

    Where will international speculators drive the Canadian dollar? I can assure you that in the short term, it will remain high. Manufacturers who export will continue to struggle.

    By: Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corporation. He can be contacted at (416) 368-8466 ext. 232 or mark@mercantilema.com or www.mercantilemergersacquisitions.com

    The MONEY® Network