When I saw (and answered) this question over on Quora, I was reminded of one of the Old Lady Job Justification Hearings. For those not well versed in BBC Radio 4 comedy, the hearings were a recurring sketch in a show called That Mitchell and Webb Sound (which later moved to television in the form of That Mitchell and Webb Look). In the sketches, a panel of old ladies invite people in to tell them about their job, then ask them a series of questions to have them justify it. Their questions poke gentle fun at modern service oriented occupations like wedding planning, pointing out how needless they are. As far as the ladies are concerned, one of the few jobs with any merit is running a little shop, and they frequently steer their subjects towards the idea of opening one.
Why did a Quora question about trading make me think of an old radio sketch show?
Because in one episode, the interviewee was a futures trader. After trying to explain to the ladies what futures trading involves, one of them asks simply, “Just tell us this: how does it help?”
The Quora question asked the same thing. How does day trading or scalping help the economy and society?
How Does It Help?
It’s a fair question. Trading is an activity that is performed entirely in the pursuit of profit. Now we can argue that many jobs are performed with profit or payment as the primary motivation, and that’s fair enough. But most jobs also provide a direct benefit to society. For example, to use the old ladies preferred occupation — shopkeeper — a shop not only gives the owner a living wage, it provides the community with a place to obtain goods that they need and / or want. The ladies are also fans of the fire service, and clearly professional firefighting provides a direct benefit to society by saving lives. It is not unreasonable then, for the panel to ask the futures trader how his job “helps”.
Actually, in the sketch the trader does try to give the correct answer. He says his trading helps the economy. This argument is laid to rest by the ladies pointing out that he’s not creating new money, simply moving it from one place to another. That’s the point at which our views diverge. It’s true that trading does not directly create new money or wealth. Any profits from a trade are not coming out of thin air, that money already existed in someone else’s account. But the ladies miss one important point: taxes.
Oiling The Machine
When traders make a profit, that profit is taxed. In most countries and states it is taxed directly as income or a capital gain. But that’s just part of it. Before the trader placed a single trade, they bought a computer or phone from which to work. The manufacturer and vendor both paid business taxes on the profit of that sale. They rented an internet connection, and the ISP paid taxes on the profit from that. They subscribed to price charts and data. They paid broker fees and commissions. All of these transactions generated revenue that was, assuming it was profitable for the providers, taxed.
Then there are the indirect taxes like VAT in Europe or Sales Tax in the States — tax paid on goods and services. When the trader spends their profits, there is a tax take again.
All of this tax is revenue that directly benefits the wider community. It pays for transport, education, healthcare (in civilised countries), and all the other infrastructure required for modern life. Yes a lot of it is wasted in bureaucracy and misspending, but by and large society functions because we all contribute.
Traders then, while perhaps not providing a direct benefit to society, are providing an indirect one. Incidentally, while the old ladies were correct that trading itself does not create new money, any profits that are banked do. Banks will lend against that balance, and because of the way fractional reserve banking works, they can create brand new money from it. So the job justification panel were only partially correct.
Day traders provide another benefit too, and one which I didn’t cover in my Quora answer because it specifically asked about the economy and society. Day traders benefit the market directly by providing liquidity. To enter or exit any trade, there has to be someone willing to take the other side. If there’s nobody there, the trade doesn’t happen and the whole thing grinds to a halt. Hedge funds and investors are not popping in and out of positions every few minutes, so have limited liquidity-creating potential. Us day traders though, make our living by jumping in and out. Every trade we make “helps” someone on the other side by making their trade possible.
None of this is to say that day trading is a virtuous occupation. Certainly there are far more helpful ways of making a living. And there are other ways traders can contribute to society than through their work. Most I know give to charity either directly or through voluntary work, and lots help out in other ways like caring for sick relatives. It did make me laugh when I saw the question asked though, and gave me a good excuse to go back and listen to that old sketch. And then a few more from the Old Ladies Job Justification Hearings.