Legitimate speculation versus excessive speculation

Abstract

The literature suggests that excessive speculation is hard to define, and thus difficult to regulate. The aim of this article is to provide a framework to differentiate between legitimate speculation and excessive speculation, using the efficient market mechanism as a guide (or blueprint). Specifically, I argue that all speculative strategies that improve market efficiency, based on public information, with no predatory/manipulative elements, can be classified as legitimate speculation, while all speculative strategies that purposely cause market inefficiencies, with predatory/manipulative behavior, can be classified as excessive speculation. Accordingly, I classify rational arbitrage, discretionary trading and systematic trend-following as legitimate speculation, which should be encouraged. Using the same framework, I classify insider trading, rational destabilizing speculation and arbitraging arbitragers as excessive speculation, which must be regulated.

BlackRock Robo‐Advisor 4.0: When artificial intelligence replaces human discretion

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