Mohamed Talal LAHLOU MOHAMED V

UNIVERSITY
PhD candidate FSJES
SOUISSI-RABAT
[email protected]

0661413813
52 Jbel Ayachi Street - Agdal

PROPOSING A BAROMETER TO MESURE THE RISK OF

SPECULATION, AND PROJECTING IT ON A GENERIC
ISLAMIC CAPITAL MARKET

Supported by professor: Dr Mohammed NADIF

Faculty of Juridical, economic and social Sciences - Souissi

Research team: Financial, economic policy and competitiveness of the company

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 PROPOSING A BAROMETER TO MESURE THE RISK OF SPECULATION, AND
PROJECTING IT ON A GENERIC ISLAMIC CAPITAL MARKET

Abstract:
In the process of exploring the concept of speculation, the researcher must go through the
essential step of the conceptual formalization of speculation. It turns out that this concept is
ambiguous and controversial. In the absence of a consensual definition of the concept and
elements allowing its measure, our research proposes to provide a detailed definition of
speculation. In addition, we analyze the main causes and factors of speculation (such as
complexity of structured products, speed of transactions, money creation, weight of insurance,
weight of derivatives…) to clearly identify the parameters of our barometer. This will help
establishing a comprehensive tool for measuring the degree of speculative risk in a given
market, with more accuracy. This article will enable to push this research a little more to
develop a "theoretical framework for evaluating speculative factors". Then, we will use this
tool at a practical level on a generic Islamic financial market to establish whether such
markets could be exposed, totally or partly, to speculation.

Keywords: Speculation; Islamic capital markets; measuring speculation; Islamic finance

INTRODUCTION

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 Since his most basic definitions of Larousse i, "Purchase of a property to resell it for a
profit" that makes it a concept which is almost similar to any business operation, to the finest
and various definitions that can be found in the literature, the concept of speculation is
undoubtedly one of the economic and financial concepts that have been the hardest to define.
It is derived from the Latin speculatio designating an observation site; used figuratively, the
term refers more generally to an intellectual reflection on abstract objects ii. Nicholas Kaldor
defined the concept as follows: "the purchase (or sale) of goods for resale (or redemption) at
a later date, in anticipation of a change in the current prices, and not for an advantage
resulting from their utilization, or transformation or transfer from one market to another iii.”
One detects in this definition the emphasis on the absence of physical economic impact of the
speculative transaction, in the second half. Economic alternatives summed up the concept to
"bet on the futureiv", taking a risk that we would release another actor from, adding that
"speculation is akin to a particular form of insurance", referring especially to derivatives.
Speculation would be a kind of anticipation or probable observation, to bet on a future course
of prices of financial assets and reap the benefits for resale. Oaidah (2010, P303) defines
speculation as an activity "aimed at increasing the volatility in the short term, through
monopoly attempts and psychological influence, and also to increase the volume of
transactions in a fictive and virtual manner and spread rumors or false information.”
Obviously, these definitions are more or less comprehensive but it is difficult to claim that
one definition covers the concept of speculation with all its contemporary components that
have evolved, and will evolve further.
Three main theoretical models differ in the definition of speculation:
1. The theory of hedging (risk hedging) defines speculative activity as a consequence
of different behavior of the operators in front of the risk. It is the result of transactions
between the "speculators" who agree to bear a risk and an opportunity to make random
gains, and the rest of operators who are willing to pay a slight premium and therefore
suffer a slight loss in return for the insurance not to be exposed to the risk of price
fluctuations. (Stout, 2011, p8).
2. The theory of information arbitrage (Grossman and Stiglitz, 1980), describes the
speculators as meticulous investors in the information that will allow them to identify
the overvalued or undervalued assets, and take advantage of these gaps ignored by the
rest of the operators. This would make the prices more efficient and provide liquidity
although this is a zero sum game between operators.
3. The theory of "heterogeneous expectations" or "disagreements" explains the
speculation by divergent interpretations between operators (Hirshleifer, 1977). With
divergent analyzes, they will proceed to different investments and their opposite bets
generally won't provide liquidity to the market but only liquidity between bettors. This
theory is at counter-current of the first two and assumes that speculation is ineffective
because speculation increases the risk without making socio-economic added value.
The research will immediately provide full details of the various components of the
speculation concept in a constructive approach that will lead to a much more precise and
comprehensive definition. Thereafter we will detail the many factors that promote the
speculation to measure them. The factors and the measurement modality chosen for each of
them make up the global tool which is intended to be established in order to measure
speculation and project it on a generic Islamic financial market.

I. Components and detailed elements for a definition

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 Today, if we want to better define the concept, with a maximum accuracy, it seems
relevant to have to analyze it from several angles, through a multifaceted literary magazine of
definitions, and to restrict it to the financial field that concerns us.

1. The actors involved

In terms of market participants, Paul Jorion explains in "Causes and consequences of
the speculationv", there is speculation since we find a player in the market who is willing to
bet the opposite of our bet. He concludes that, immediately, on a spot market there is no
speculation (although the term “less" would've been preferable to "not", as will be explained
later) and the speculation is only for future operations, as no one bets conversely in the
immediate market. Indeed, it is much more expensive to speculate by buying large volumes of
shares to bet using an inexpensive derivative (Stout, 2011, p3). Thus, we need at least two
players on the same transaction for there to be speculation, and it operates mainly on future
markets (options, future ...) and therefore derivatives. Always at the level of the players,
Ashley (2009, p4) states in "financial speculation" that rating agencies use the word
speculative when an investment takes place in an asset whose owner has some difficulties or
is insolvent. An investment in a share of a near bankrupt company whose recovery is
unlikely, is for example, considered to be speculative.

2. The market context in which speculation intervenes.

Speculation is successful especially in a volatile context with frequent price variations,
both upward and downward. The speculator would have little opportunity to generate
recurring margins in a very stable environment. We find this idea with one of the former
leaders of the Chicago commodities exchangevi.
Moreover, Ashley (2009, p17) informs us that, far from the theoretical rationality,
markets are in reality most often guided by the theory of the (craziest or wildest)
explaining that the speculator continues his activity until he is convinced that there will be a
more adventurous and irrational actor that we are who will be ready to purchase the asset,
even if it is overvalued. These behaviors, based on the feelings of the actors rather than the
actual fundamentals of the business, largely support the creation of speculative bubbles. This
analysis is largely based on theories of behavioral finance. Regnault distinguishes between
two types of speculation; One that is harmful, usually powered by expansionary monetary
policies, as we shall see, and another, useful, which is the calculation made by the speculator
to play the role of insurer. Today 97% of derivatives are used in a purely speculative
perspective while the figure was only 2% in the eighties (Chance, 2003). Volatility is
remarkably enhanced by the presence of speculators.

3. The objectives of the operators in the financial markets

According to various analyzes on the phenomenon of speculation, many experts and
analysts agree that the success in this field belongs to those who know best how to predict the
next step of their colleagues, predict the psychological evolution of the market, not those
who analyze the economic and financial situation the best, (Oaidah 2010, P305). The crowd
psychology is more important than the behavior of rational investors (Pepper, 1994).
According to Oaidah, speculation is purely virtual purchase and sale transaction that aims
essentially to take advantage of price fluctuations and volatility in the short term,
without any intention or possibility of purchasing (possession / ownership / use) the
underlying, nor the intention to get the goods delivered, waiting for the dividends from
an investment or to hedge for the long-term (Oaidah 2010, p204). Thus, in the long term,
there is no delivery but only a margin payment of the losing party to the winning party, a kind

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of compensation, liquidation of positions. Finally, speculation would be to predict the future
movements of the actors rather than the changes in economic realities, because although a
business can be doing well, if market participants think the opposite, then the share price will
fall. What is important is the beliefs of actors, not the economic realities or the real
profitability of any particular investment adds Buffet (2000, p. 14), as speculators spend their
time "monitoring the rumors of each other ". Keynes (1936, pp. 154-155) already supported
this factor, explaining that speculation consists of "battle of wits" with the aim to surpass the
crowd, stand out and have a "step ahead of the public" without having as a main concern the
economic fundamentals of our assets.

4. The operative horizon in the speculation

The short term remains the main operative horizon for a speculator. Keynes confirmed
this by arguing that speculators are not concerned by the long-term returns on their
investment, but only watched the valuation of the current assets (Keynes, 1936, p 154-155).
The dictionary of finance and international insurance vii supports these statements by defining
speculation as "term used in some cases with a pejorative connotation and is applied to
investments for short-term benefits". We also find this with Tickell (2000) when he argues
that speculation refers to short-term investments and rapid gains viii. This sense of impatience
and its practical application at the level of speculation prompted Keynes to say after his years
of stock market experience, that only long-term investments are serious and profitable
(Ashley, 2009, p41).

5. The degree of risk in the activity

If there is a more subtle distinguishing criterion of investment speculation and
gambling, it is that of risk. It should be specified from the beginning that the speculator does
not support risks related to the underlying asset he holds, apart from the market risk.
Moreover, Ashley (2009, p4) states that the behavior of the speculator is generally riskier
than that of the investor. The first therefore accepts a higher risk, and that is what
distinguishes investment from speculation, among others. Al Suwailem adds more details and
clarification by stating that not only the risk is higher, but in a purely speculative activity, the
probability of losing is greater than that to win. The speculator accepts this probability as
the amount of potential profit is important in his eyes, which minimizes the low probability of
gain. When the risk of loss is too large, we fall in the field of gambling, such as betting and
casinos where the probability of gain is negligible. So, what stands as a border between
speculation and investment is the "confidence" of the actor in the probability of success of the
operation. "An action that fails more often than it succeeds cannot be considered as a source
of profit" (Al Suwailem, 2006, p60). From a practical point of view, investigations have
shown that the probability to make profits from speculative investments on options is 25%
(Summa 2003).

6. The tools inherent to speculation

Speculation is generally beneficial since the speculator acquires sufficient tools to
anticipate future psychological movements. It was this ability to anticipate prices that pushes
some to justify speculation, in addition to the supply of liquidity. Unlike real investment
activities, the speculator can move from one activity to another that has literally no direct
economic link with the first, while using the same tools and methods. Are there any tools that
are so adaptable? One should know that probabilistic mathematics is the support of almost
all derivatives that are themselves essential tools to conduct future transactions. "The market
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obeys a law that dominates: the law of probability" (Bachelier, 1900). These derivatives, in
some cases superimposed to infinity, are necessary to speculation (Saber 1999b, p122).
This mastery of probability and statistics in the speculative process is not sufficient.
Derivatives used are generally dedicated to future operations which constitute the core of
speculation. We could also add the mastery of analysis techniques, such as chart analysis
using moving averages, among others, to predict the behavior of the operators, and at what
moment the market might turn around. The chart analysis is more based on crowd psychology
and variation of probability than on fundamental analysis, which itself is more concerned with
the actual economic fundamentals (Pepper, 1994). It falls within the area of self-fulfilling
prophecy. These tools are valid regardless of the medium activity (commodity services, from
finance to agriculture). The use of these tools is aimed at, according to Keynes, going faster
than the market, suggesting to the speculator that he is smarter than the market.
It should be noted that information is a fundamental tool of the speculator, or rather, the
information asymmetry. "Speculation amounts to deliver an information to the entire
market (or the indication of information) known only by the speculator ix". Without this
asymmetry, that however contradicts one of the five pillars of pure and perfect competition
(transparency of information), the speculator may not be beneficiary in a sustainable way.
Between insider trading and the arrival of information to the general public, the positioning of
speculator is quickly done and allows him to position himself ahead in the fast-moving
market. "Not only there is not a single speculator who hasn’t a quite clear opinion about
probabilities of an event, but there isn't perhaps two out of one thousand who have the same
opinion on all the causes and effects of market events”(Regnault, 1863, p20)

7. Economic impact of speculation

Speculation is a non-productive (and more risky) activity (Oaidah, 2010, p307), as no
real or tangible asset is derived from the speculative operation. The real investment is a
productive (and less risky) activity tied to the real economic activity while speculation only
leads to wealth transfers from one group of financial operators to another (Al Suwailem,
2006). Ultimately, speculation proves to be a zero sum game, a characteristic shared with
gambling, at the macroeconomic level (Greenspan, 1999). This is an unproductive zero-sum
game with a transfer of wealth between amateurs, experts and other insiders. What began
at the microeconomic level by a zero-sum game inevitably ends at the macroeconomic level
to a negative sum game, because of the systematic transaction costs to be borne by actors and
adverse effects on the real economy (Al Suwailem 2006 p46). The problem is that this zero-
sum game has more impact on the world's population than that of horse betting or casino,
especially on monetary policies or the prices of essential goods x. How could this zero-sum
game be still lasting? Stiglitz (2002, p198) states that thanks to the money of government
subsidies and bailouts, the speculation continues.

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 8. Similarities with gambling
Whether it's in the previous century’s jurisprudence (a jurist from Poitiers asserted that
a bet is a contract where the contracting parties decided that one will lose and the other win) xi
or in the work of recent economists on speculation (Gonzalez asserted that "you could call it
as you want, in my book it comes as gambling") (Steinherr, 2000), the basics of the concept of
speculation are relatively numerous and its resemblance to gambling is recurrent. The
opinion of an expert of the commodities market, a trader, abounds in this sense when he says
"If a trader speculates, he won't survive. Because speculating is gambling, and there is a day
when he will be wrongxii”. Gilbert Cooke (1969, P391) even claimed that "we wont find any
differences between gambling and speculation". The Nobel Prize of Economy, Maurice Allais
(1993, p35) just as well as Keynes before, explains this resemblance stating that "The
derivatives market is a gigantic casino where poker games are played", proposing to
permanently remove the possibility to speculate on the price of any asset.
This analysis reviewing definitions and clarifications of many economists regarding
the concept of speculation allows us to set the following definition, which takes into account
the main components of the definitions mentioned repeatedly by the economists.

9. Our definition of speculation:

Virtual business activity outside the productive sphere and generally occurring in
a context of significant volatility, speculation consists of gambling and predicting future
psychological evolution of market operators, using statistical and probabilistic
mathematics, while taking advantage of information asymmetry and short-term price
fluctuations, through financial transactions. Not concerned with the physical value,
dividends or cyclic usufruct of the negotiated product or its underlying asset, this activity,
riskier than the investment and real trade, has a greater probability for failure, and
results, at the end of the day, in purely monetary compensation / liquidation operations of
wealth transfers between amateurs and insiders, in a zero-sum game (or negative with
fees) without creating economic value, resembling in many of its aspects games and
gambling with few winners and many losers.
In bold are highlighted the major components of speculation. It appears obvious that
the concept is complex to identify and define simply, as its components are numerous. A
summary table presents the similarities and differences between gambling, speculation and
investment or real trade, clarifying the boundaries, often confused together.
Bets and gambling Speculation Real investment and trade
More winners, major risk More winners, major risk More winners, fewer risk
Psychology dominates Psychology dominates Fundamentals dominate
Bas social image Bas social image Positive social image
Ego and adrenaline are significant Ego and adrenaline are significant Ego and adrenaline are marginal
Sudden events occur very often Sudden events occur very often Sudden events are rare
Short term vision Short term vision Middle and long term vision
No underlying asset The underlying is just an indicator The underlying is the goal
Chance and probabilities dominate Chance and probabilities dominate Chance& probabilities are marginal
Not productive, no real flows Not productive, few real flows Productive, real flows appear
Zero sum game Zero sum game Win win situations are the basis

II. Main factors explaining speculation

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 After agreeing on a definition of the concept of speculation, the study will attempt to
lay the foundations for a tool that should help to measure the rate of speculation in a given
economy. The measurement of this rate has an essential prerequisite which is the
classification of the causes of speculation by clarifying the criteria to measure. It is undeniable
that the more the stated factors are mutually independent, the more accurate the criteria is. But
this is not always obvious to some factors as we will discuss.
According to the literature, two major classes of speculation factors are distinguished:
endogenous and exogenous factors. Within this classification, three main groups of factors
emerge:
• Factors related to the functioning of the market, tools and transactions
• Factors inherent to the general context of the market and the operators
• Factors associated with the poor governance and the lax regulation
The three categories of factors will be discussed one by one, after which we will formulate a
proposal of criterion to measure the factor in question. It should be noted that the
measurement of certain criteria is not obvious, and their evaluation will be deferred for further
work. In front of each of the factors will be included a percentage that will show its weighting
in the barometer of speculation designed, the details will be displayed just after.

1. Operational techniques, tools and market transactions

a. Leverage effect and deterioration in the solvency
There is currently a strong trend often described as a leverage effect race. Indeed, from a
macroeconomic point of view, all the actors have an interest in reducing the debt. In this
environment and in terms of individual rationality, the actor who decides to embark on a
strategy with a high leverage is likely to multiply profits. Under this approach, each actor has
an interest in pursuing this strategy, leading ultimately to a suboptimal Nash equilibrium,
and an increasingly unstable system (Al Swailem, 2012, p18). According to Greenspan
(2003), derivatives are inherently highly leveraged. Moreover, improper leverage can be
encouraged by the margin purchasing practices, themselves legalized by the majority of
stock markets. A trader could with only one million Euros buy the equivalent of ten million
euro of securities. This explosion of artificial liquidity increases the excessive demand for
securities on the market, pushing the speculative pressure up. The ratios of one to forty were
observed on some markets that allowed a trader to invest forty million Euros in titles while he
came to the stock market with only one million Euros. In fact, for such a leverage, a 3% loss
on purchased assets is sufficient to the traders bankruptcy. This practice is not new, as
Kindleberger says that, around 1857, a man with a capital of 100 pounds had an outstanding
credit of 400,000 pounds! (Kindleberger, 2004, p71).
Thus, the measure of coverage of the debt burden is effective to assess the solvency of the
economic agent. This indicator reflects the ability to cover interest payments and a portion of
the principal that will make the interest won't compose further, and so this is one of the best
measures of solvencyxiii.
As for the debt / disposable income, as soon as it exceeds 100%, it raises fears for about an
insolvency of the situation of the economic agent. A level of 150% makes the agent more
vulnerable to shocks generating insolvency (Allen & Damar, 2011, p58). Generally, the debt
of a person who declares bankruptcy is 60% higher (on average) the average debt in a country
like Canada, according to a statistical study from 2011 (Allen & Damar 2011 p58). The
probability for bankruptcy is extremely high when the debt on the average income exceeds
200% and almost systematically starting from 240%.
The decline in the solvency of a certain segment, usually the most sensitive, of the population
usually occurs after financial institutions have targeted these clients with loans even though

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their incomes do not allow coping with such loans. They are also the ones who are most often
bankrupt. This decline in solvency can also find its source in other settings such as the shift in
economic conditions or any other exogenous event. However, it should be noted that the
significant propensity to over-indebtedness is an endogenous element. According to Minsky,
there are 3 categories of agents: The "medium", the "speculative" and "Ponzi". The agents
with a speculative debt level are those who manage only to cover the interest on the loan.
Their sensitivity is very high to damage. The more important their share in the assets of
financial organizations is, the higher the speculative risk is and the greater the instability is,
with cascading effect (& all Askari, p28).
- Sub-factor measurement: Assets / liabilities. If one wants a lower debt, EBITDA should be
well positive. At the end, the higher the leverage is, the more fragile the situation is.
b. Debt with interests, its securitization and its trade that exceeds assets
The concept of financing by debt bearing interest reflects the acceptance by the financial
world of the possibility of separating the growth of monetary aggregates from that of the
economic sphere. The time and risk are actually two sides of the same coin. Interest is an
endogenous vector of instability which, being somewhat little fluctuating during periods of
economic stability, increases the pressures in times of instability, and makes the environment
even more volatile by increasing particularly the refinancing costs (Al Suwailem 2006 , p42).
Thus, in the same way as interest allows the world of finance to evolve in a disconnected
manner from the real economic world, derivatives have also been able to grow well outside
of the real economic risks. It is for this reason that the debt based on the interest was
considered an aggravating factor favoring speculation and financial crises (Chapra, 2004) xiv.
Thus, in the absence of interest rates, flows between financial institutions would be based
more on assets than on liabilities, easily transferable from one market to another. In this way,
a world economy based on assets and dominated by them would have stabilizing effects in
relation to speculative opportunities presented by debt trade and derivatives (swaps ...)
(Askari & All 2010, p 47). "During periods of euphoria, many credit instruments are
securitized, which fuels speculation" (Askari & all, 2010, p27). All credit instruments (credit
card, mortgage, student loan, bills ...) being securitized, their negotiating increases
significantly. Economic agents are investing more and more money in debt products /
securities (which are other agents liabilities) that are highly uncertain, instead of investing
these funds in productive economic assets. The Broadening of the range of the tradable
securities thus, punctures the economic sphere and feeds the purely financial sphere in a
euphoria whose only limit generally is the speculative bubble burst (Askari & all, 2010, p27) xv
. This view had already been raised before by Keynesxvi .
- Measure: Securitization & (Volume of the bond market + derivatives) / (Stock+ other
assets)

c. Excessive financial innovation and hyper-complexity of poorly understood

derivatives
Although it had many advantages in creating funding opportunities, financial innovation
has often been used to circumvent prudential regulations designed to reduce speculation
and exposure to systemic risk. A fund manager of the "fixed income" has the possibility, for
example, to circumvent the prohibition to invest in the stock market, by structured products
(Askari all 2010 & P147). Due to the fact that financial innovation becomes more complex,
the investor has to deal with products less and less understood. This lack of clarity promotes
speculation as the uncertainty increases in front of these products and their real evaluation.

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This increased product complexity inevitably accompanies, for derivatives, an undesirable
effect in times of downturn, namely illiquidity, which can promote another type of
speculation in times of recession, namely speculation on the decline with short-selling.
Besides there is a large number of amateur investors who speculate in misunderstood and
very little transparent derivatives, hoping to make rapid and significant benefits.
- Measure: Number of underlying assets by market assets and Number of new products /
year
d. Transformation of derivatives into speculative vehicles
Created to serve as hedging instruments for traders and other operators in the financial
markets, derivatives were quickly used for more profit mainly through speculation.
Derivatives are mainly composed of futures and options, and some other exotic products
(swaps, trackers ...). In the 80s, as already mentioned, 2% of derivatives were used for
speculative purposes and 98% for hedging. Today it is 97% of them used for speculative
purposes. Only 2.7% are used by end users (Al Suwailem, 2006). The number of
speculators with derivatives far exceeds that of the "hedgers" who seek to cover and insure
themselves against price fluctuations. This wouldn't have occurred if the secondary
derivatives market did not exist, that is, if the derivative was a bilateral contract between a
trader and an insurer. Current operators wishing growth and prosperity from the derivative
market are subconsciously wishing for increased risks which are somehow the counterparty
of the derivatives (Al Suwailem 2006, p39). At the end, rather than designating them as
products, investments or placements, we should call them "bets" (Stout, 2011) due to the
practice leading to their compensation and clearing in 97.3% of cases. Therefore, betting is
an ideal vehicle for speculation.
- Measure: Percentage of derivatives held to maturity and the percentage of the
marketable derivatives used for speculation.
e. Continuous quotation, speed and frequency of transactions
Continuous quotation is something that is often linked to hyperactivity at the level of the
financial markets. This technique started with the computerization of financial markets.
Previously, the quotations were done generally once a day, after confronting the orders of
purchase and sale. This procedure did not allow having practices such as "day trading" , let
alone the high-frequency trading (HFT) which allows for millions of transactions on a single
security in a second. This continuous quotation technique now allows for a significant number
of transactions. "We even observed that the passage in 1986 from the fixing to continuous
trading had no reducing effect on the volatility of share prices, but quite the opposite"
(Lordon, 2010)xvii. Needless to say that the advent of this endogenous and systemic change in
the organization of the market had some positive and sometimes negative impacts. Note,
especially, among the positive impacts the continuous visibility of prices, both nationally
and internationally. However, some argue that this type of listing increases instability and the
possibility to speculate in the short term without added value for the real economy. Indeed,
the argument for the need to reconcile economic and financial horizons made its way
among economic analystsxviii, yet we are well aware that a company needs some time to
finalize a productive activity, which is generally not limited to a few minutes between two
financial transactions. Maurice Allais, Nobel Prize for Economics in 2001 had called for the
suspension of the continuous quotation in order to reduce speculative pressure on the
markets (Lordon, 2010)xix. Some called for a daily "fixing”, which would allow a single cycle
of daily exchanges, others weekly and some monthly.
Nonetheless, there is a degree of arbitrariness in fixing this time scale, which relevance would
be enhanced in case there is further empirical study on speculative intentions and horizons of

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investors in the stock market. However, the element that seems common to the critics of the
continuous trading is the importance of putting an end to speculative behavior that dominate
transactions at the level of the continuous quotation, especially those related to the "day
trading" and the high frequency trading. Both practices are considered the most obvious
manifestations of the speculation linked to the continuous quotation. The first is considered by
leading economists as pure speculation (Obeidollah, personal interview in January 2014). It
allows players to make dozens of trades in a day and enjoy the low price changes in
significant amounts for cash gains related to these micro-variations occurring throughout the
day. Al Suwailem (2006) shows that 90% of "day traders" end up losers. As for the high
frequency trading, it is a different dimension. Flourishing since the beginning of the
millennium and particularly in recent years, this new practice allows for millions of
transactions per second, and can generate billions of transactions per day, per machine and
security. A scale that is difficult to imagine for humans and even normal computer can't
understand. These transactions are the result of algorithmic programs applied by powerful
robots, developed by computer scientists versed in finance to automatically execute
transactions without the need for human intervention. This is an exponential multiplication of
"day trading" if we want to simplify things. Jeff Stibel, in the Harvard Business Review,
described the HFT "legalized betting" or "legalized gambling" at the stock exchange.
Moreover, "the managers of investment funds can not really clearly explain the behavior of
these algorithms because they have some ability to learn over time and incorporate
behavioral changes", probably an artificial intelligence applied to finance, "none of us clearly
understands." Synchronously, market slippages are also happening at a greater speed in the
HFT era. On May 6th, 2010, a "FlashKrach" have led to the depreciation of the US stock
indices by almost 14%xx in seconds was stopped by the Chicago stock exchange using an
unprecedented step: turning off the stock quotation systems for 5 seconds! These transactions
now account for nearly three quarters of the volumes in the US, and about 40%xxi of
transactions in Europe. Another unusual risk in HFT is that of financial crime and
concealment of fraudulent transactions. Indeed rating systems retain data per second,
sufficient time to conduct millions of transactions for robots, and therefore hide some
information to the regulator, possibly falling under the sway of market manipulation with
speculative aim. Eric Dezeuze explains that "The CSE has been unable to collect all the data
transmitted to the market caused by the runaway of an algorithm. A malicious fraudster can
use algorithms like dissimulating vehicles." "Some data that could help rebuild the order
book is not always available with the desired quality" days Sophie Baranger, Deputy
Secretary General of the the Financial Markets Authority (Paris). For the president of FMA, if
it's not possible to gather irrefutable evidence to allow dissuasive sanctions, market integrity
can only be ensured by eliminating or limiting the risk at the source. In other words, "if we
cannot control the high frequency traders, we must then limit or eliminate the high frequency
tradingxxii."
- Measure: Number of orders made daily / market capitalization & Mean Time detention
of a title & HFT’s share in the total trade.
f. Spoofing
Practice known for ages (false auction), spoofing involves placing orders to be canceled
just prior to the transaction. Several objectives can facilitate this practice, including two
major ones, namely the desire to spread false information to the market in order to push
prices in one direction or the other, or the will to send multiple orders at different prices for
the actor who will perform an important transaction in order to not be spotted by
opportunity hunters and intermediate traders who will see an opportunity to make gains
along the way.

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"We nowadays reach over 99% cancellation rate. Some orders are canceled in less than one
millisecond after being sent, and even twenty micro seconds in certain cases", comments
Sophie Baranger, Deputy Secretary General to the Investigation and control Branch of the
FMAxxiii. This practice fuels speculation since it helps to disseminate false information in the
market, which reduces the efficiency from a macroeconomic point of view. Although the
importance of spoofing can encourage speculation, it should be noted that the non-execution
of an order is not always motivated by speculative reasons. It is possible for the order to be
real with the will to execute, but finally canceled because the price doesn't correspond
anymore or the economic operator no longer wishes to make the transaction for economic
reasons, though this case is rare. However, this practice tends to be increasingly monitored
and even banned by some financial centers, as in Canada xxiv. "In October 2008, for example,
the London Stock Exchange has imposed a penalty of $ 35,000 to a company for spoofingxxv."
- Measure: Percentage of canceled orders

g. Short selling
Short selling is a process that involves selling an asset before buying it, anticipating a
decline in the value of the asset. The difference between the price on the date of sale and date
of delivery is the margin collected by the operator that sells the asset short. This process is
banned in some markets but widely used in others. It is generally viewed as highly
speculative since it participates in the creation of an additional artificial supply in a time
where supply is already excessive, which pushes prices down more than the natural tendency
after confrontation of the actual supply to the actual demand. Concisely, the trader sells short
the shares of an entity, the entity sees its situation and its rating deteriorate, it is forced to sell
off urgently some of its assets to meet prudential ratios, which pushes the price further down.
Thus, although profitable from a microeconomic point of view to the agent who uses it, it is
perceived as a sign of forthcoming price fall on a given asset, and therefore as bad news as
soon as it is used. It therefore contributes to increasing the panic effect when an asset suffers
difficulties on the market. On September 19 th, 2008, Wall Street has temporarily banned
the use of short selling, one day after the London Stock Exchange, after observing that this
tool increased volatility and opportunities to speculate downward against the securities
already in trouble, as was the case against the major banks in 2008. Thus, the short sellers
would have pocketed $ 3 billion by betting on falling Lehman Brothers, aggravating its case
and reducing its chances of survivalxxvi. Currently, short selling is prohibited on bank shares,
but permitted for other sectors...
- Measure: Legality of short-selling & short-selling volume / stock volume
h. CDS & other insurance on speculative financial transactions
The insurance sector has often been regarded as the second pillar of finance, in addition
to the banks. Insurers have the original role of sharing the risks through minimum
contributions relating to the price of assets, to compensate possible losses. This mission may
nevertheless deviate from its initial purpose when the insurance product is seen as a license
for more risk-taking, and, in the same way, promoting speculative behavior. This is
particularly true of CDS products (swaps) used by major insurers like AIG to provide certain
financial transactions too difficult to understand, prompting many financial operators to
increase their risks in exchange for the subscription of CDS thinking they would insure
themselves against the risk. This behavior had adverse effects because it encouraged the
speculative risk, which has led to a major financial crisis in 2008. The near-collapse of AIG
finally showed that "all" could not be covered, and certain highly speculative behavior among
other things should not have happened. Another problem arises when the insurer himself
seeks speculation. Ashley mentioned that the insurer, in cases such as life insurance (and we

12
can easily add CDS to the list), used to write the insurance policy with "globally the same
state of mind of that of the lottery company issuing a lottery ticket "(Ashley 2009 p12). In
these cases, it is obvious that certain insurances encourage speculation. By way of
comparison, the value of the notional of CDS's alone reached in 2008, 67 000 $ billion
although all bonds and shares were worth $ 15,000 billion in the US, which shows the extent
of the disconnection (Stout 2009). At the macroeconomic level, the risk has not
disappeared, it just moved from an operator to another.
- Measure: Volume of insurance products on the financial risks / stock markets

2. Context and market operators

a. The original intention of the operator is to speculate in the short term
Well upstream of committed transactions, there is the step of the intention of the operator.
Indeed, many perceive the market as a game. It is not uncommon to hear traders use the
term "game of chess", "playing" and other words within the lexical field of gambling. Thus
Paul Jorion stated that 95% of players want neither regular dividend or delivery or
consumption of raw materials. They are simply looking to speculate in the most ludo-
analytical sense. The trend of the first half of the 19th century in the American courts was
to prohibit transactions in options and futures from the time where the intent to deliver or
accept the goods didn't motivate the agents (Swan 2000 , pp. 212, 219). Given that it is
"impossible to distinguish a speculative position, which is a gamble, from another one that
would have an economic aim" (at the stage of initiation of the operation) (Tumpel-Gugerell
(2003)) the best way to test this intention is done in the aftermath, namely the execution or not
at maturity of the futures contract or option for the derivatives.
-Measure: Liquidation rate / compensation before maturity & Delivery rates at maturity.

b. Greed, prestige and ego wars and of numbers between traders

Some behaviors that are found in markets are just extensions of very natural behavior of
humans regardless of their activity. Yet, unlike the casino player who ruin his family by
speculating on numbers (which is already very irresponsible), the speculator on the stock
exchange may cause famine in an entire continent by speculating on derivatives, related to
the price of wheat for example. In the financial world, traders engage a battle not only on
performance, but also an ego battle to see who will make the best performance this year or
the first to be promoted. This ego battle can cause a risk minimization when making
investment decisions, and even taking many speculative positions. "As shown by the detailed
experiments, the auction of the Dollar 1 begins with motivation to earn money then goes to a
conflict in which the bidder is trying to" win "and refuses to give up." (Colman 1999, p. 197)

c. Volatility
Whether seen as a cause, a manifestation or a consequence of the speculation, volatility is
necessarily a starting point for the speculators. It has been mentioned above in the part of the
definition that volatility allows the trader to take advantage of low price changes in order
to act in the short term, and that this practice itself favored speculation. A low volatility
would cancel the benefits made by the speculators due to the transaction costs. Hence the
need for volatilityxxvii increases. The link between speculation and volatility seems to exceed
the causal link to be part of a continuous circular dynamic. This increase in volatility
paradoxically replenishes the system, pushing companies to apply to the financial benefit of
1
Experiment conducted by psychologists to test to what extent the participants are willing to pay a dollar more
expensive than its value, as they are sure to be able to trap their fellow or sell it to their neighbours.

13
hedging derivatives to hedge against large fluctuations. The derivatives, supposed to
mitigate risks do in fact increase and thereby, are creating more volatilityxxviii (Al Suwailem
2006, p15). Volker noted also that speculation is the primary cause of volatility. Volatility
also increases with the excitement of the market. Yet, the volatility alone certainly cannot
explain all the speculative initiatives. "However, it is true that speculation in metals markets
cannot explain the sharp rise in prices. There is indeed a close correlation between the
development of the fundamentals and the extent of speculation. In times of stable and
adequate supply to demand, prices on the markets of commodities fluctuate in a limited
manner, which reduces the potential benefits of speculators and thus limits the extent of
speculation.xxix "
- Measure: Market Volatility
d. The profitability of financial activity exceeds the profitability of the real economy
It is obvious that, from an individual point of view, individuals are generally attracted by
the best profit opportunities. When confronted with purely financial opportunities that are
more profitable than real economic investments or purchases of shares in the long run, the
economic player will favor operating in the financial markets as the profits collected will be
higher than of the real economy. This fact, which makes that stock market movements
often exceed those of GDP, is in itself a significant pull factor for many players seeking for
greater profits. For example, after the use of derivatives to hedge, the majority of agricultural
producers began to speculate in the first two years (Chance 2003). Also, the financial sector,
especially at the level of financial markets, is very profitable, pulling the brightest students to
turn to trading careers. So while the average salary in France was around 25 139 Euros in
2010xxx, the average earnings of a trader in France were close to one million Eurosxxxi. In
other words, the incentive to speculate is much greater than that to work in the real sector.
- Measure: Salary of traders / Average salary & Market Change / Change in GDP
e. Lack of interest in ethics, profit as the only performance indicator
This parameter is linked to the education of operators and their moral sensibilities when
completing financial transactions. It is obvious that the majority of players are attracted by
profit; however, there are limits to this motivation. One element that promotes speculative
behavior on the market refers to the thinking and behavior of the operators in front of profit.
The success stories of major traders in London or New York which make the headline of
each financial newspaper often push new generations to seek success, always faster. The
concept of real production process (industrial, agricultural or services) being generally absent.
The only comparing criterion is the next door trader. The operator seeks quick success
through increasingly risky positions. This risk-taking favors increased speculative risk at
the level of the markets, which means more vulnerability and instability. This attractiveness of
profit at the expense of other performance evaluation criteria is characteristic of financial
spheres and promotes behaviors that can be speculative and unethical.
Moreover, many young traders are not only lacking ethics, but are little aware of the
macroeconomic impacts of their decisions, they are more concerned by how to circumvent
the regulation (168 Askari & all). The youth effect is not very helpful due to the high levels
of testosterone secreted during their operations according to a survey; they are more
predisposed to take riskier and speculative positions than the rest of the investors.
- Measure: CSR sensitivity of funds & traders’ Average age

f. The behavioral analysis largely dominates the fundamental analysis

14
 "As long as companies and households see that others are making profits on speculative
purchases and resale, they tend to follow like troop sheep" (Kindleberger, 2009, p18).
Mentioned above, the trend of operators to favor the evolution of decisions of traders
rather than the development of the economic fundamentals of the market makes the market
investment analysis riskier. The first part has helped see to what extent the key to success in
this field is up to those who know the best how to predict the next step of their colleagues,
predict the psychological evolution of the market, and not those who analyze the best the
economic and financial situations (Oaidah 2010, P305). "The crowd psychology is more
important than the behavior of rational investors" (Pepper, 1994). Thus, although the
fundamentals are available and possible to analyze, the decisions of the actors are themselves
far less obvious, the margin to speculate and the risk are thus increased. This makes the
probabilistic mathematical tools to analyze market trends, herding effects and other mood
effects far more attractive than the fundamental economic analysis. This element is
endogenous to the system; it dominates the lessons, assessments, and the entire financial
environment up to the realm of self-fulfilling prophecies. Thus, Bachelier (1900) informs us
that a century ago, "The market obeys a law that dominates it: the law of probability." This
ensures that speculative possibilities are larger because human behavior is more difficult to
predict and identify than factual financial data of companies or states.
- Measure: Importance given to the Chartist analysis & Chartists / economist numbers &
dominant Performance Measurement Criteria & Modules dominating the finance
majors

g. Derivatives bought by the adventurous rather than by the strongest, as in theory

At their emergence, derivatives were to be used to transfer risk between economic
operators and financiers, so that the first can have insurance on the final sale price that he will
collect at the end and the second may have an opportunity to make profits (or loss) in case of
change of prices, assuming that the second is an agent that has the ability to bear this risk
and lose his bet. This was the ideology in the beginning behind the creation of derivatives.
Soon, analysts have found that generally the more adventurous speculated on derivatives,
and not the agents who had the greatest capacity to bear the risk (Cf Lehman Brothers).
Finally, the system was allocating risk to those who wanted it most (Al Suwailem p39).
- Measure: Quality of capital and assets of operators and banks

15
 3. Governance and flawed regulations
a. Money creation and abundant liquidity
Many economists have warned through their analysis about money printing, so easy to
initiate, so difficult to control. Indeed, the expansion of credit and the money supply are
one of the main factors of the multiplication of the speculative frenzy. Buying at a margin
helps in some markets, it becomes easier and more profitable to speculate by borrowing
(during the growing period) than having a real economic activity. "The increase in the money
supply and credit reinforces the speculative wave, it is sometimes its cause" (Kindleberger,
2004, p59).
Many historical examples support this evidence, be it the 1850 boom linked to the discovery
of gold mines or the euphoria of the 20s following the development of consumer credit and
the growth of 30 glorious following Bretton Woods that allowed the enlargement of the credit
basis. The tools allowing for the expansion of the monetary base are many, such as
securitization and trading of debt products, but the principal remains the lower interest
rates and the credit framework. Simons instituted this relationship of cause and effect as a
fundamental principle (Askari & All 2010, p 25). Fisher stated in 1933 in his "100% Money"
book that the expansion of the money supply was the main factor of speculation. Galbraith
(1954) argued that speculative bubbles are accelerated by the credit expansion. We note that
there exist exogenous corollary to this factor, namely the influx and flow of foreign capital
that can both trigger speculative waves as well as internal expansionary monetary policies.
- Measure: Interest rate, M1 / M3 report M1 / GDP, debt / GDP, FDI / GDP
b. Information asymmetry, opacity and false rumors
"Being at the center of the market ... Sage (one of the speculators analyzed by the
author) had access to a flow of information which was not available to other small operators,
and certainly not for the occasional speculator investing after an idea or a misplaced
advice"(Ashley, 2010, p32). The author also refers to the large amount of information that the
OTC operators could get from operations in this opaque market, information unavailable to
external operators. This privileged access to information is usually at the heart of the
strategy of the speculator, a near insider, to the extent that many economists agree that from
at the moment the information is disseminated to the general public, the trend upward or
downward is in its final stage ... so that once that information reaches the ground, it is already
too late to make a deal based on this information. It is obvious that at this stage of the
asymmetry of information, operators must be separated into two classes: the insiders and the
rest. Here he is not in the criminal side, but he is nevertheless insider. We are far from models
of perfect information and market transparency. This asymmetry is one of the decisive
factors for multiplying speculative trading, whose majority would not take place in case of
equality of operators in front of the information. Oaidah states that some operators have
voluntarily issued wrong information or false rumors to mislead the market, to speculate on
a particular title (Oaidah, 2010, P303).
- Measure: Number of yearly insider trading cases
c. Lobbying of major financial players on politics, who will be protected in times of
crisis
In a system controlled by dominant players, it is natural to see that domination turned
into effective lobbying, and often efficient. The US financial industry is politically powerful
and exerts enormous influence through lobbying and strategic contributions to support
politicians (Johnson, 2009). This is particularly evident in times of crisis and when we

16
analyze the decisions that are taken by governments to deal with recessions. Generally, when
the political and economic forces are closely linked, policy makers do not hesitate to save the
financial institutions that have exaggerated in speculation, and usually at the expense of the
taxpayer through tax increases, cuts in subsidies or other measures whose effect is to share
the losses of major financial institutions. For example, financial lobbying in Wall Street
weighs more than the major US arms industry lobbying.
Thus, overall, the risk will be split "between the public and the private sector" (Greenspan
2003). "In other words, it is the government (and therefore the taxpayer) who bears the risks
of the speculators" (Al Suwailem, 2006, p50). How can the speculators then sustainably make
profits in a zero-sum game? In fact, according to Stiglitz (2002, p198), "what makes
speculation profitable is the money that comes from the governments." This tendency (moral
hazard) to "share the losses and privatize the profits" (Chorafas, 2003, p135) pushes the
speculator to continue his activities or to take even more risks speculating, making it an even
more risky system (Loowenstein, 2000, p230).
- Measure: Number of rescues / number of financial failures & Weight of lobbying
d. Excessive deregulation, regulators having less qualified staff than financial
institutions
"History has shown that financial institutions have always outpaced supervisory and
regulatory agencies' (Askari & all 2010, p56). Soros (2008) confirmed that speculative
bubbles are growing because of the deregulation. With the wave of deregulation that
followed the Thatcher and Reagan years, and which reached its culmination with the total
abolition in 1999 of the Glass-Steagle Act, separating the deposit and business operations and
others, the financial world had the opportunity to intervene in a more global and less regulated
environment. "The excesses of speculative bubbles intervene in lax regulatory conditions"
(Askari & all, 2010, p33). Even the regulators concede this: staff and resources are not at all
sufficient to be able to follow the mastodons of finance and control them. This is particularly
evident when analyzing the quality of the regulatory authorities’ managers and their wages
compared to traders. The first are far better trained (and therefore more likely to have a lead
in term of the regulation bypass) than the latter who most often have procedures and are in a
reactive approach. Some analysts were comparing with the automotive world arguing that
controlling the current financial giants by current regulators was like wanting to get a Fiat to
chase a Ferrari... Add to that the financiers who have the possibility to act transnational.
This is generally not true for regulators. Thus, with the weakness of the regulatory authorities,
the margins of speculation cannot be wider. Note that the waves of regulation / deregulation
seem to follow from a historical point of view the same waves of growth cycles / recession.
- Measure: Budget of regulators, Volume of fines, the profiles, the Volker Rule
e. Domination of intermediation and large institutional players (oligopoly)
According to the Office of currency control (OCC), 96% of the notional amount of
derivatives is controlled by five banks only, with 2.7% of the derivatives that are used by end
users and 97.3% by intermediaries, usually institutional investors. Thus, this market
concentration is strongly correlated to speculative activities as there are no attempts to use
the derivative at maturity, but to liquidate, which dominates the behavior among large
financial institutions. Thus, the "hedgers" are a tiny minority in the market, and speculators
dominate. This concentration is an indicator but it is also a signal of instability due to the risk
pooling within a few operators. This generally puts them in a position of "market makers" and
"too big to fail" that turns all power balance in their favor, whether with the market or with
regulators. This deviance from the natural conditions of a healthy market is favorable to the
development of speculative behavior, more dramatically, from these financial institutions. As

17
to this are added the conflicts of interest established in the sector, as the rating agencies are
paid by the institutions they assess, we end up with dramas making for example, Lehman,
with all its speculative subprime positions, was rated AAA on the eve of its bankruptcy.
- Measure: Degree of market concentration, Independence of rating agencies
f. Domination of parallel operations and accounting
It is only since 2000, with the (Commodities Futures Modernization Act) that many
derivative contracts began to be accepted by all US jurisdictions, having been banned by a
decision of the Supreme court in 1884 invalidating any future contracts whose protagonists
did not intend to deliver the goods (Stout, 2011, p6). Thus, the ancestor market for OTC
(over-the-counter) is literally a parallel private market and whose legality was of little
recognition. This decision blew volumes within these parallel markets, from $ 88,000 billion
in 1999 to over $ 600,000 billion in 2008, 10 times world GDP. Today, the authorities are
aware of this but the area of action is narrow due to pressures. Thus, the Dodd-Frank Act
prohibits negotiating swaps that do not aim to cover the risk, over the counter, but does not
close the doors to new derivatives that could circumvent this rule. Suffice to say that the
research departments of major financial institutions should not lack the resources to
circumvent the rule. It therefore seems clear that the existence of such parallel and less
regulated markets is likely to favor gambling and speculative behavior "in private".
Furthermore, and in addition to this OTC trading in parallel and that is not very transparent,
newly adopted accounting standards place them off-balance sheet. This in an environment
already dominated by rapid and opaque global operations, this regulation is able to promote
the ability to speculate, even on commodity derivatives. Note that the exploitation of
loopholes in accounting standards can in some cases result in the circumvention of certain
regulations, fraud or scam. Kindleberger argued that "The propensity to scam and be
scammed evolves together with the propensity to speculate" (Kindleberger, 2004, p89).
Association of genres which may seem surprising at first glance, it appears that the links
between speculation and scams are more numerous than it seems. Indeed, scams are fewer in
stable and well regulated markets (Askari et al, 2010, p161). They generally proliferate in
opaque areas, with attempts to make transactions very profitable very quickly. It is a mindset
that is common with that of speculation. The degree of fraud is more an indicator of a
speculation environment rather than a factor of speculation, useful to be analyzed. Added to
this is the horizon of flexibility mirrored by the regulator to the speculator. If punitive laws on
fraud and speculative deviations are firm and heavy, then the likelihood of such behavior
decreases (Kindleberger, 2004, p56). So it’s a whole state of mind, and an opaque and
speculative environment that is created by these elements.
-Measure: Number of frauds / year & Volume of fines / Market Capitalization ,Volume
of recoginzed derivatives in off-balance / Total Weight in OTC

g. Possibility of fiscal and regulatory arbitrage

From a global perspective, in the era of the global village, multinationals and hyper
connectivity, it is clear that the scope of national regulations is reduced. Indeed, as
mentioned above, the circumvention of regulations is done using tools such as derivatives.
In some cases, traders ask for experienced lawyers to circumvent the rules. In other cases, the
tax and regulatory arbitrage moves towards tax havens beyond the regulations of the major
financial centers. Thus, it is recurring to note that the domiciliation of many funds in the
Seychelles or the Bahamas. Note that 50% of global financial flows end up in tax havens

18
(ARTE: Black finance)2. While this alternative exists, speculative behaviors are encouraged
because they could have some continuity without beings confronted with the laws and other
prudential regulations. Currently, the "shadow banking" weighs about $ 60,000 billion, the
equivalent of the GDP of the entire planet. These transactions represent one quarter of the
financial transactions in the world. The "shadow banks speculate," commented Professor
Faust. These agencies generally operate globally and are based in tax havens remaining secret
funds for many players.
- Measure: Number of law firms / capita, Volumes from tax havens from the country
studied, Rates of domestic companies domiciled in these havens

III. Barometer of evaluation of speculative factors

This passage in review of the factors of speculation relates to the analysis of many
experts and economy specialists. Obviously, certain criteria have elements in common, but
this list has been compressed to make the criteria set up independent of each other and
relating the different elements.

1. Equations and weight measures adopted

The establishment of a barometer for measuring speculation needs to go through a
preliminary step of weighting each factor, knowing that not all are equal in terms of size and
links to speculation. The weight we carry is derived from a questionnaire that was
administered to a panel of fifteen researchers in economics and finance, which evaluates them
according to the importance of each factor in the speculation, in the light of the conclusions of
the literature review. The contribution of each factor will have a percentage that is clearly
indicative. The barometer is composed of three major factors which are the main possible
causes of speculation. The first factor is measured using eight sub-factors, which each one’s
contribution clarified in two ways: First by a top ranking by order of importance, then using a
small red cursor under each sub-factor which assesses on a scale of 1 to 5 sub-factor's
contribution to the speculation, and therefore the reference factor.
The degree of speculation is defined by one of following two methods:

The selective evaluation: Ǝ {α (a⋃b⋃ ... ⋃h) ⋂ β (a⋃b⋃c⋃d) ⋂ γ (a⋃b⋃c⋃d⋃e)}> 0.8

Here, as soon as one has at least one major factor in each sub-category (> 3.75), which has
reached a critical level of (> 0.8), we can say that the market is at risk of speculation.
The overall weighted evaluation: ° = S (+ 0,4α 0,3β 0,3γ +) * 100
The second method is more comprehensive and composes with all of the sub-factors by
weighting each of the three factors, it evaluates the degree of global speculation. Note that the
first alpha factor is weighted at 33% more than others given its increased importance.
Equations to evaluate each of the three criteria of its sub-factors:
α = (4,75a + 4,75b + 4,75c 4,5d + 4,25e + 4,25f + 4.25 g + 4h) / 35.5
β = (4,5a + 4,5b + 4c + 3,75d + 3.5e + 3,25f + 3.25 g) / 26.75
γ = (4,5a + 4,25b + 4c + 3,75d + 3,75e + 3,5f + 3.25 g) / 26.75
2
https://www.youtube.com/watch?v=zbX-vIzkObM (6/9/14)

19
 2. Grid and reading elements
Two reading grids are possible for this barometer
• The selective method: showing off in colors the sensitive / critical sub-factors
• The global weighted method: the calculation of the "S°" average of the barometer’s
factors
It should be noted that the study refrained from giving a reference rate for each of the
criteria evaluated in the sub-factors as the arbitrariness would be dominant. It was considered
that the tool would be used in different markets and different settings that would make the
reference rate (a rate meaning the sub-criterion has reached a critical or even dangerous level)
be revised first. The institution of the reference rate should be projected on a leading
benchmark in order not to deliver results that are too far from the context. Generally, the
elements measured should often be based on the total market capitalization or the GDP of the
countries studied in order to make logical and relative comparisons.
The scale used for the analysis of the sub-factors will be a scale of 0 to 1
Low Level 0.2 / 0.4 normal level / 0.6 sensitive level
0.8 Critical Level / 1 Dangerous level
The important thing is to fix in the most precise way possible the normal reference level
selected for each sub-factor, and the scale of change that will determine changes required to
move to the next level. The level of each sub-factor will be illustrated by a slider, this time on
top of each sub-criterion, which will show the level measured for the sub-factor in question.
The composition of the sub-factors will give the level of each one of the factors which in turn,
using the model, will determine a speculative level for the market studied. This level will use
the same scale used for the sub factors that we’ve just detailed (0 to 1). It should be noted that
the measurement of the third sub-factor of the second column, being delicate, the measuring
field has been left blank, at the discretion of the user. The visual example (cursor) and
calculation was given for the first factor. Let’s remind that it is not necessary for all the sub-
factors to be high for the market to be considered as speculative. It is sufficient that just one or
two sub-factors among the most important in each category reach critical levels for the market
to be considered risky and speculative.

20
 3. Mapping the Assessment model of the factors of speculation

IV. Projection on a generic Islamic financial market

1. Graphic Projection of the model

21
 2. Reading and interpretations of the projection on Islamic finance
On the occasion of this first test of the evaluation barometer of speculative factors, the
study focused on a forward projection at the level of the factors and sub-factors. Indeed, in
order to make a projection and numerical application of the barometer, it is necessary to
choose a defined financial market, which would allow having measures of each sub-factor
with the corresponding ratios. The current projection is proposed to make an inventory of
speculative sub-factors by highlighting on one hand those whose Islamic financial markets
are fully immunized (in blue) and the other (purple) those who might exist at the level of
Islamic financial markets. This second category is also related to the law interpretations
adopted by each market which will vary from market to market. What attracts the attention
first is that the majority of factors are in purple. We know that one of the five fundamental
theoretical principles of Islamic banking is the prohibition of speculation. One of the projects
of the discipline should be to better define what is meant by '’prohibition of speculation",
beyond general words. The detailed and closer analysis of the concept finally shows that
many speculative factors may be present in the Islamic financial markets. We find Sub-factors
related to three main factors. We found enough to qualify a potential Islamic financial index
as speculative. This conclusion, rather unexpected, is explained by two main elements. The
first is that the Islamic financial industry is far from achieving economic maturity and
independence and regulatory maturity that allow it to frame the best markets and actors
involved in it. The second is for the regulatory differences and judicial interpretations that
we find between "sharia boards" of markets, and consequently Islamic financial markets.
To illustrate concisely the occurrences in the two categories, it will take three sub-factors to
which Islamic finance is immune and three that can occur even in Islamic financial markets,
and explain these illustrative examples:
Three sub-factors to which Islamic financial markets are immune:
• Securitization and debt products exceeding the asset market: For this factor, we
must remember that bonds and all debt derivatives are either illegal (bonds ...) or non-
negotiable in the secondary market (Sukuk Murabaha, Salam), and therefore can’t
promote speculative behavior.
• Short Selling: Immunity on this factor is due to its strict prohibition.
• CDS and other Insurance derivatives: The classic insurance products being banned,
and given that it is not possible for solidarity insurance like takaaful to cover illegal
activity such as debt securities, the occurrence of such a factor is excluded.
Three sub-factors that can occur, variably depending on the context:
• Leverage and deterioration in the creditworthiness: Indeed, the indebtedness of
each agent being difficult to control, despite the fact that debt products are not
negotiable, we are faced with an opportunity to see the financial environment develop
towards more unstable conditions if the item is not controlled.
• Greed prestige and ego wars between operators: This element inherent to any
financial operator is not excluded if the agents are not sufficiently aware.
• The creation of money, credit growth and the ample liquidity: These elements play
a major role in creating the speculative conditions as has already been discussed. In an
Islamic financial context, the creation of money is normally prohibited according to
some experts, but the opinion is not unanimous, prompting us to classify the factor in

22
 the second category. Thus, apart from an Islamic financial market that would evolve
into a fully Islamic economy where money creation would be proscribed, it is very
likely that the conditions of liquidity follow the general tendency that dominates
monetary policy, which can be lax in the studied market. Add to that the possible
excess liquidity with the foreign direct investments.

Conclusion
"The financial crisis triggered in 2007 was attributed to several factors, including financial
engineering, derivatives, low interest rates with a loose monetary policy of the Fed,
inadequate minimum levels of regulatory capital in financial institutions, uncontrolled
leverage, unprecedented speculation, opaque accounting and inadequate information that
accompanies them, greed, fraudulent behavior, an inadequate regulation and supervision and
more and more. History will judge to what extent each of these factors contributed to the
crisis."(Askari et all, 2010, p161). It is with this relatively accurate inventory closing one of
the articles making up their book "Stability in Islamic finance" that the authors are trying to
go around the factors of speculation. The purpose of our study was to assess how each of
these factors contributes to speculation, detailing a little more the concept of speculation
before projecting the concept on Islamic finance. We had to go through the inevitable and
complex step that was to define clearly and with a maximum possible detail, speculation. The
decomposition of the speculative concept was meant to go through a literature review that
allows having a definition that goes beyond the divisions and controversies around this
concept, including all its major components. Indeed, it is inconsistent to talk about the
causes, let alone cures, to speculation, without stating in a clear definition and starting points
for the analysis. Once the definition obtained, the study makes an inventory of the main
factors in order of importance, promoting speculation. Some marginal factors have been
deliberately removed, or merged with larger factors that showed similarities. Thereafter, it
was necessary to clarify the importance of each of these sub-factors and their contribution to
speculation. It is very important to note that speculation is not a result of the sum or
combination of all sub-factors. Speculation can intervene even when only a few factors reach
a significant or critical level in the market studied. This is the reason why we have split the
approach into two models: the selective method and the global method. The framework
helped to highlight the equation setting of the three major factors of speculation, and the
contribution of each of the sub-factors to its benchmark factor. This evaluation by several
equations was supported by a graphic illustration of the barometer of speculation. This
mapping provides insight into the classification of factors, sub-factors and metrics. The three
main factors of speculation can be summarized as:
• Factors related to the functioning of the market, tools and transactions
• Factors concerning the general environment and market operators
• Factors related to poor governance and lax regulation
One of our previous studies had demonstrated how Islamic finance was, if its theoretical
principles were applied fully, completely free of speculation. But this fact remains more an
ideal than a reflection of existing practices. The projection of these three factors, with the
details of the sub-factors, on a generic Islamic financial market enabled us to see to what
extent, and contrary to what was expected, Islamic financial markets are not fully immunized
in front of speculation. The study goes beyond this observation by stating that the majority of

23
listed speculative factors may occur in a theoretical Islamic financial market that takes into
account the various jurisprudential opinions currently existing among various "sharia boards."
The findings of this projection require to be further empirically studied to be confirmed, a
study that should aggregate the analysis of various actual Islamic financial markets. Only in
this way, we can perceive how Islamic financial markets, one by one, are exposed to
speculative risk.

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