In defence of speculators: Don’t shoot the market’s shock absorbers

In public debates on economic stress, market speculation is quickly condemned as an act of financial sabotage. In Bangladesh, this view is very common. Commentators often describe speculators as bad actors. They blame them for falling share prices and dollar shortages. Blaming speculators targets the messenger instead of the problem. Informed speculators provide essential services. They create ongoing liquidity and absorb financial shocks.

Real-economy participants do not trade every day. A factory sells foreign exchange only when export payments arrive. A bank buys government debt only when surplus deposits build up. If markets depended solely on direct end-users, trading would slow down. An exporter wanting to sell dollars in the morning would have to wait for an importer wanting the same amount at that exact moment. This delay would widen trading spreads and cause sharp price jumps.

Speculators remove this friction by taking on price risk for profit. They narrow spreads and lower transaction costs for businesses. In doing so, they create steady secondary-market trading. Without secondary-market liquidity, primary markets stall. Developing new financial products then becomes impossible.

Over the past few decades, our market has witnessed several innovative debt instruments. Issuers have introduced zero-coupon bonds, microcredit securitizations, corporate debentures, and bank Tier 2 capital bonds. Yet, these innovations rarely developed into active, self-sustaining asset classes.

Without speculative participants trading in the secondary market, these instruments failed to achieve repeat commercial value. Institutional buyers treated them as buy-and-hold private placements, locking them away until maturity. As a result, product development relied uncomfortably on fiscal concessions and regulatory mandates. Authorities resorted to special tax exemptions, mandatory investment quotas, and waivers from single-borrower legal lending limits. When an instrument requires regulatory life support rather than active market pricing to survive, the product line inevitably stagnates.

This liquidity shortage shows up clearly in foreign exchange and money markets. A healthy forward market needs active trading in both spot foreign exchange and interbank lending. Without two-way flow in these basic cash markets, banks cannot price forward contracts accurately.
When forward markets fail, the entire derivative structure breaks down. Useful tools like currency options and interest rate swaps need an active forward curve.

This gap causes trouble across all asset classes. In the bond market, thin trading prevents clear pricing, so companies struggle to issue long-term debt. In the stock market, the lack of hedging tools forces investors to rely only on rising prices. Foreign direct investment and portfolio investment suffer as well. Global funds must manage currency risk. When an economy lacks basic hedging tools, foreign capital faces steep uncertainty. Global investors then demand extreme risk premiums or take their capital elsewhere.

When markets lack standard risk tools, companies still look for protection. Lobbying regulators then becomes the main hedging strategy for local businesses.

Firms do not buy forward contracts or execute swaps. Instead, they ask authorities for special policy help. They seek interest rate caps, special exchange rates, and loan delay packages.

This habit harms market discipline. Political influence replaces proper risk management. Meanwhile, the actual financial risks remain in the system.

A thin market dominated by passive investors invites price cartels. In contrast, well-funded independent traders deter market abuse. When an insider tries to distort an asset price, opposing traders sell against that distortion and help restore normal levels.

Bangladesh showed the danger of ignoring this balance with equity floor prices. The policy tried to stop paper losses, but it drove speculative money away and stopped two-way trading on the Dhaka Stock Exchange. Buyers vanished, portfolios were trapped, turnover fell hard, and normal investment stopped. Halting regular trade does not protect an exchange; it simply freezes it.

In a functional market, speculators act as shock absorbers by stepping in to buy battered stocks when panicked long-term investors rush for the exit. Because speculators have shorter investment horizons, they are willing to warehouse falling assets to capture short-term rebounds. Their willingness to buy on down days establishes a natural price floor, provides an immediate exit for sellers, and keeps turnover moving.

The foreign exchange crisis of 2022 and 2023 demonstrated the exact same failure. Facing acute dollar shortages, authorities blamed bank treasuries and currency dealers for speculative hoarding. Officials imposed rigid caps and set multiple artificial exchange rates for exporters, remitters, and importers. By suppressing normal market-making and trading margins, the policy paralysed the interbank currency market.

Remittances moved into informal channels, import settlements stalled, and the informal curb rate surged far above official levels. Instead of calming the market, silencing price discovery and speculative liquidity deepened the currency shortage. If currency traders had been allowed to take open, view-based positions, market makers would have priced future currency scarcity into a clear forward premium.

Higher prices in official channels would have pulled export dollars home faster and kept worker remittances within regular banking routes. By continuously trading the mispricing between current scarcity and future supply, speculative market makers would have absorbed currency volatility gradually rather than leaving the system vulnerable to a sharp, sudden devaluation.

To regulate effectively, authorities must separate honest, view-based speculation from financial crimes. The two activities differ completely in intent, method, and market impact.

View-based speculation relies on publicly available information, macro trends, and economic analysis. Traders risk their own capital on an uncertain future. They might be right, or they might suffer heavy losses. This open risk-taking helps markets discover fair asset prices and keeps trading active.

Market abuse operates through fraud and unfair advantages. Insider trading exploits confidential, non-public data to extract guaranteed profits at the expense of ordinary investors. Price cartels, circular trading, and false accounting distort market reality to deceive the public. These criminal acts destroy market integrity and require severe regulatory penalties. Conflating informed, view-based risk with financial fraud leads to bad policy, driving legitimate capital away and leaving markets dry.

Global financial centers understand that liquidity costs money, and risk-takers provide that service. Policymakers in Bangladesh must stop treating market traders as enemies.

Encouraging active trading across equities, currencies, bonds, and money markets is vital for market growth. It supports new product development by ensuring the proper distribution of risk. This process creates a resilient financial ecosystem capable of absorbing macroeconomic shocks. That institutional capability also builds investor confidence and attracts foreign capital. Speculators do not create financial trouble; their trading provides the depth that helps the wider economy handle market stress.

* Sajed ul Islam is a senior banking executive and financial markets specialist with three decades of global institutional experience across treasury, capital markets, and corporate governance.