Tottenham Report: If It Looks Like a Duck … By Andrew Tottenham, Managing Director, Tottenham & Co April 19, 2021 at 10:00 pm If it looks like a duck, swims like a duck, and quacks like a duck … The fallout from the collapse of Football Index continues. Foot Stock, a similar concept to Football Index, pulled its funding from the crowdfunding platform, Seedr. And much indignation has been coming from politicians and showing up in the media about the amount of money people have lost, reports of up to £100 million. The blame is being put squarely on the shoulders of the Gambling Commission for licensing the company to begin with. Firstly, it must be remembered that for many of those “losses,” there were people on the other side of those trades. They were not open bets with Football Index holding the cash; rather, people acquired “shares” in football players’ future performance. Money was transferred from one person to another, with Football Index acting as the conduit. Secondly, if you buy something for £10, the price rises to £100, then subsequently reverts to nothing, you have not lost £100. You’ve lost £10. What was lost and looks likely to be returned was any uninvested value sitting in peoples’ accounts, which had some form of protection. The Gambling Commission appears to have pulled the plug after becoming concerned that Football Index was carrying out activities that were beyond the competence of the Gambling Commission. The implication was that some of the activities were, in fact, financial instruments and should have been regulated by the UK’s financial regulators, not the Gambling Commission. Interestingly, in the USA, Eris Exchange (ErisX), a derivatives clearing organization, sought approval from the U.S. Commodity Futures Trading Commission (CFTC) for futures contracts associated with NFL games. In this instance, ErisX withdrew their application before CFTC’s deadline for approval, because they had been told that the contracts were unlikely to be approved. The reason given was that the contract would be in violation of their regulations that forbid contracts based on gambling. On the one hand, it is gambling. On the other, it is investment. Which is it? It is my view that our financial and commodities markets are nothing more than gambling, but require a different set of skills from our gambling regulators. The arguments supporting the position that financial markets are not gambling boil down to two things: that there is an element of skill and that markets tend to go up in the long run, so if you invest in the long-term, you will make money. Investing in gambling, on the other hand, is unlikely to increase the size of your investment. I know some who consistently make money betting sports and would disagree with that statement. I also know successful options and commodity traders who will tell you all they do is bet every single day. Stock markets perform valuable functions. They allow companies to efficiently raise capital to expand or make acquisitions and provide an assessment of the value of the company. But the vast majority of activity in those markets is something else entirely. If the value of the stock markets were static, investing would be a zero-sum game. Whatever one person makes, another loses. For markets to go up more and more, capital needs to flow to those markets. If the total capitalisation of the markets increases more than the fees taken out, it is no longer a zero-sum game. But most investment is not long-term and some, high-volume traders for example, trade thousands of times a second, hoping to squeeze a small margin out of each of millions of trades. These high-volume traders’ only advantage is speed; can they “hit” the price before anyone else? Today, that speed is measured in nanoseconds, so much so that trading companies co-locate their servers in the same place as the stock exchange so that their trade is not delayed by the length of a longer cable. Tell me that this type of trading is not gambling. Some argue that a company’s share price is linked to the anticipated performance of the company. I would agree it is linked, but the anticipated performance influences the sentiment about whether the price of the share will rise or fall. If the weight of capital is on the side that the share price will go up, the price will rise and conversely, if the weight is on the other side, the price will fall. Markets are all about sentiment; most investors make decisions based on whether they think the share price will rise or fall. Hedge funds and other algorithmic trading systems do the same. They look for indicators: Who is buying and who selling; what volumes are being traded; whether there is “momentum” behind a stock price, etc. They are trying to predict what, in essence, and certainly in the short term, is a random event. Cryptocurrencies have become popular, primarily because the price has soared, but these products have very little utility today. People are buying them on the basis that the price will continue to go up. As long as people believe that, the price will continue to go up. This is exactly the same as Tulip Mania, when in the early seventeenth century, Dutch people were buying tulip bulbs, not because they wanted to plant them and grow flowers, but because they thought the price would continue to go up and they would be able to sell them at a profit. Some did and made a serious amount of money. But when one bulb was selling for the equivalent of ten times the annual income of an artisan, something was bound to go wrong. When it did, many lost huge amounts of money. An average of $6.6 trillion is traded every day on the global currency markets. The volume has very little to do with the buying and selling of currencies to lubricate foreign trade and everything to do with gambling. Currency traders place bets by buying and selling different currencies. It is exactly the same with commodities, futures options and other derivatives. Just because there may be some skill (admittedly, very little for most) involved in deciding what and whether to buy or sell something does not mean it is not gambling, as the daily fantasy sports operators found out to their cost. In the past, it was easy to distinguish between what was “gambling” and what was “investing”. “Investing” involved financial, property or commodity contracts and “gambling” didn’t. But today, technology is allowing products to be created that blur these lines and are putting strains on the old definitions and on the regulators. There will be more products like Football Index, though hopefully better thought through. Either way, they will need a regulator with the skills and experience to regulate them. Gambling regulators are concerned with probity, fairness, money laundering and reducing gambling harms and not understanding the ins and outs of financial or derivative contracts. Financial regulators have the requisite skills, but are obsessed with promoting the fantasy that “investing” is not “gambling” and will never admit that it is. They believe that the investing public would be turned off if they thought their pension and personal savings accounts were invested in a great big casino. I believe the public would be better served and less vulnerable to scams if we could all agree that most that passes off as investing is, in fact, gambling.