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Jewish World Review
Sept. 15, 2008
/ 15 Elul 5768
Enabling risky behavior
Rabbi Dr. Asher Meir
Q: Many people in my neighborhood are interested in "day trading". I am thinking of opening an office to serve them, setting up terminals for trading and market info. But I'm concerned about the large number of traders who lose money.
A: The reason the vast majority of day traders lose money is very simple. Every transaction has two sides. Every stock, future or option bought by one trader is sold by another. The only way you can consistently make money is if you have some source of information that makes you consistently better informed than the other side of the transaction. If you are worse informed, the other person is making money at your expense; if you are equal, then both traders lose, while the brokers win.
Professional analysts have the resources and training (and sometimes the connections) to obtain superior market information, and quite a few are able to beat or at least match the market. But amateur day traders are almost never in a position to have better information than other market participants, and in most cases the opposite is true. In rare cases a few might make money by being alert to certain market trends; a few make money by plain dumb luck, just as there are a few people who win at the casino; and the vast majority end up with trading losses compounded by brokers' fees compounded by the cost of overhead, for example the kind of office you are contemplating.
In my opinion, this activity is even worse than going to a casino. Many people go the casino as a form of recreation; they know they are likely to lose money but figure the losses in their entertainment budget. Many ordinary people play the market in a way that it not very different; they may take a liking to a particular stock or strategy and decide they want to try it out. Sometimes they win, sometimes they lose, but they are seldom betting the rent. But the typical day trader who spends hours at the terminal is usually playing with sums he can ill afford, and nurtures dreams not of making a few dollars on a clever trade but rather of actually making a living by trading.
Our sages had a dim view of professional gamblers, or hustlers, who take advantage of wishful victims. First let's see their point of view, then let's see how it applies to your situation:
The Mishna states that a dice-player is disqualified to testify in a Jewish court. "And the following are disqualified: the dice player, and the usurer . . . Rebbe Yehuda said, when does this apply? When they have no other livelihood, but if they have another source of livelihood, they are accepted."
The Talmud discusses this disqualification as follows:
What is wrong with a dice player? Rami bar Chama said, because [the bet] is a condition, and such a condition is void. Rav Sheshet said, this is not considered a condition. Rather, it is because they don't contribute to the common good. What is the practical difference between [the two views]? The difference is one who studied another trade. (1)
Rashi explains the two opinions as follows: According to Rami bar Chama, the professional gambler, the hustler, wins by misleading his victims regarding their chance of winning. They think the odds are with them, when in fact they really don't have any chance. This is barely better than outright theft. According to Rav Sheshet, professional gamblers live in a shady underworld of easy come, easy go; they don't understand the concerns of ordinary people and the gravity of a court proceeding, and so we can't rely on their testimony.
In Judaism, each person has an obligation to save his fellow from harm and loss.
As I explained above, neither of these categories applies to the average professional investor. Very few are in the position of benefiting specifically at the expense of unsophisticated investors. Even casino operators do not necessarily qualify. Most people who gamble at casinos are well aware of the odds against them; they gamble for recreation, not for earning potential. (There are also many who gamble as a form of showing off their wealth, and a certain number of gambling addicts, so I personally don't think this is the most respectable or socially productive profession one could choose.)
So if you were to benefit specifically from trades with day traders, you would fall squarely into the Mishna's definition of a unreliable and anti-social "dice player". It is true that running a shop for these people is not quite the same. Unlike the hustler, who misleads the target regarding the true terms of the deal, the platform host gives his clients exactly what they were promised and what they expected: a functional trading platform. And he is involved in a completely above-board business.
Even so, I think the spirit of the hustling prohibition applies also to those who provide facilities to day traders. In most cases, the entire purpose of this business is to give customers enough rope to hang themselves financially. This is just a parallel way of making money at the expense of the greedy but unsophisticated mark.
I can think of a number of ways an operator could avoid these pitfalls. For example: publicizing the exact track records of past traders; publicizing figures on the overall loss figures for day traders; insisting that all traders spend a couple of weeks trading only with "play money" or for very low stakes; ensuring that the trading stake is small compared to the trader's net worth, etc. However, I strongly suspect that any operator who ran such a transparent operation would find himself with only a handful of customers - trained professionals who prefer to work near home and some wealthy people who enjoy trading their own portfolio.
In short, your concern is thoughtful and well-placed. In Judaism, each person has an obligation to save his fellow from harm and loss, as the Torah states (Leviticus 19:16), "Don't stand idly by the blood of your brother." Certainly it is improper to create the conditions for loss. I think opening up a "day trading station" is a bad idea.
SOURCES: (1) Babylonian Talmud, Sanhedrin 24b
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JWR contributor Rabbi Dr. Asher Meir, formerly of the Council of Economic Advisers in the Reagan
administration, is Research Director of the Business Ethics Center of Jerusalem, Jerusalem College of Technology.
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