A Short-term Trader On The Risks Of Short-term Thinking

A Short-term Trader On The Risks Of Short-term Thinking

Short-term trading is an important part of finance and it’s the business of Nadex. But short-term business models are horrible for investors, businesses, and the economy. The arrest of Pharma CEO Martin Shkreli is just a grotesque example of a wider problem.

A Short-term Trader On The Risks Of Short-term Thinking
A Short-term Trader On The Risks Of Short-term Thinking

Short-term trading, buying and selling that lasts from seconds to weeks, is an important part of finance and it’s the business of Nadex, the North American Derivatives Exchange, where I serve as communications director. But short-term business models, which sacrifice growth for quick profits, are horrible for investors, businesses, and the economy.

I’ve traded futures and options for 18 years, never holding anything for more than a few months. Disclosure: neither I nor any Nadex employees trade on the Nadex exchange, per CFTC regulations. The risk in trading futures or forex is too much for most people, despite what a lot of brokers will tell you.

That’s why Nadex is such a great innovation: it offers binary options and spreads with built-in risk limits, so you never lose more than you can afford. It democratizes access to the markets for people who couldn’t trade otherwise. But enough about Nadex.

Traders look to minimize risk and achieve outsized returns using leverage. One of my best early trades turned $740 in options on oat futures into $17,000 in three weeks. I got them dirt cheap and rode a volatile trend that drove up demand. Buy cheap, exploit demand. It’s a fine business model for traders.

But what if the thing you bought cheap was a lifesaving drug like Daraprim? For 62 years, Daraprim has helped to treat and prevent malaria and deadly infections. Its patent rights were sold around until they were bought by Turing Pharmaceuticals, whose CEO, Martin Shkreli, treated his pharmaceutical firm like it was the hedge fund he used to help (mis)manage.

He hiked the price of Daraprim from $13.50 a tablet in the US to $750. Generics in India, the UK, and Brazil cost less than $1 and it’s $2.25 or so in Canada; so US customers were already being gouged, as the law basically requires. But Shkreli thought like a good trader. The demand was certainly there—after all, it can mean life or death for some patients. So why not control supply and see what price the market will allow?

Shkreli is now in jail for securities and wire fraud, but some are seeing it as just desserts for his exploitation of sick and dying people for profit. The thing is, Shkreli was just the most obnoxious practitioner of a widespread business model. The Guardian wrote, “Mr Shkreli did not even qualify as an entrepreneur. Yet his lazy strategy is surprisingly common.”

Short-term business models are lazy. Lots of companies overcharge for medicines. Some exist only to do that; they don’t do any research and development on new drugs. They have no long-term plans other than to buy more drugs on the cheap and leverage the demand from sick people to make money.

True capitalism is about creation, not exploitation. The problem here is deeper than the excesses of a few profiteers. Markets are making long-term thinking unprofitable and profiteering profitable. That goes against what every free-market capitalist believes, that markets create innovations and prosperity.

You see this short-term thinking in many industries, but one of the most sickening is the way we encourage and require students to become lifetime debt servants. As state governments reduce their support for public higher education, which looks more and more like a front for NCAA sports, which has its own indentured servitude problem, higher education has turned to two horrible solutions: higher tuition and for-profit universities.

To pay for either one, most students must take on large debts, so they begin their careers owing tens of thousands of dollars. By law, they can’t escape their student loans even if they go bankrupt after a health crisis (which often happens since many new graduates are uninsured). Banks can even raise fees and garnish their wages for decades. Many people are working quarter-time for a bank and less than half the time for themselves and their families.

It would be worth it if the education meant good jobs afterwards. But nearly 80% of students of for-profit colleges never graduate and even graduates struggle to get middle-class jobs. So what’s the business incentive to run a university that doesn’t produce quality graduates?

Tuition payments guaranteed by the US government. Most student loans are backed by a federal guarantee. If the student defaults, the taxpayers pick up the payments. And the for-profits get paid no matter how lousy an education they provide. You can set up your college on the cheap and then exploit the demand for higher education that is part of American culture and policy.

Buy cheap, exploit demand, and get outsized leverage courtesy of the US Congress, who get generous donations from for-profit colleges and return huge subsidies to them. It’s a business model guaranteed to do two things: provide great quarterly returns and create millions of underprepared, indebted, and unhappy people. The US cannot remain the kind of country that invented drugs like Daraprim with that kind of short-term thinking.

When companies lay off employees to boost quarterly returns to shareholders, or sacrifice unprofitable R&D to pay for more marketing of outdated but lucrative products, they make their shareholders happy for sure. So happy, in fact, that they cash out and leave, because they, too, are thinking like short-term traders and not long-term investors. But for the sake of our future, companies and governments have to think in decades, not quarters, months, and news cycles. Leave that to traders like me. 

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