Gambling on Economic Data

Much of the history of finance and indeed of all commercial practice involves making the distinction between risk management and gambling. It took an act of Parliament to enable the growth of the maritime insurance market in England. Prior to that, insurance was considered a form of wagering.

Let's define gambling, without any value judgments being implied, as the artificial creation of risk for the mere purpose of assuming it. Viewed in this light, it should be easy to categorize betting on the spin of the roulette wheel as gambling. Until the roulette wheel was itself created and players agreed to participate in the game, no risk existed.

Economic Derivatives

All traders and investors are at risk from the results of economic data, whether or not they want to be; the numbers move the markets irrespective of whether they should or not. The risk, however, is attached to particular markets, not to the number. The selloff in the Treasury market or the rally in the dollar last Friday with the release of the employment situation report involved tradable and specific instruments with embedded risk. The headline non-farm payroll (NFP) additions - "the number" - were the agent of that risk. But in the absence of a tradable instrument created for the sole purpose of assuming that risk -- our definition of gambling above -- the number carried no actual risk itself.

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