LME nickel, energy companies and the FTT

The wounds at the London Metal exchange over the nickel contract are, in our view, largely self-inflicted. Cancelling trades is not a good look for an exchange. But the effect is that:

The plunging liquidity represents an escalating crisis for producers and consumers who rely on the exchange to hedge their pricing risk.

If the speculators disappear then there’s no one to take the risk being shifted by the real world market participants. This not being the purpose of such exchanges, but it is the economic function. The purpose is just to allow people to buy and sell in a regulated manner. The effect is to risk shift.

All those energy companies went bust because they didn’t shift their risk onto such exchanges. Partly because some of them were just silly, partly because such risk shifting was expensive - not enough speculators in the market to make the risk shifting cheap.

Which brings us to those varied ideas for a financial transactions tax. The Robin Hood Tax and so on - the aim of all of which is to make such speculation in futures, options and other financial markets more expensive. Which has the knock on effect of making the risk shifting more expensive, so people will do less of it.

The deliberate aim of the FTT is to make all markets work as badly as LME nickel or the retail electricity companies. And why would we want to do that?