Curbing financial speculation

👉🏽 This story is developed as part of the Doughnut Economics for Policymakers guide.

Governments can redirect finance away from harmful speculation and towards productive, regenerative activities through setting limits, product bans, financial transaction taxes, and strategic national frameworks. Yet effective policy design and implementation remains contested in the face of the increasingly complex and globalised financial system. 

Overview

Excessive speculative financial activities divert investment away from productive uses such as regenerative businesses, healthcare, education, and green infrastructure, toward non-productive speculation. Examples include high-frequency stock trading (buying and selling within seconds for marginal gains), and property flipping (purchasing real estate purely for quick resale profits). Governments can curb this through many different approaches. Some examples include:

• Setting limits: The UK, USA, and EU cap the size of shareholdings or derivative contracts traders can hold; most high-income countries limit investor borrowing through loan-to-value ratios.
• Bans on highly speculative products: Many countries —including Bangladesh, Egypt, China, Morocco, and Nepal — have banned cryptocurrency mining and trading. The USA prohibits banks from using their own capital for short-term proprietary trading.
• Financial transaction taxes (FTTs): Levies based on the value of specific financial trades, such as currency exchanges, stock trades, and bond transactions, can help deter high-frequency speculation. Around 40 countries use FTTs, including many in Europe, plus Colombia, India, Japan, and Peru.
• National strategies to align finance with the real economy: China prioritises this through a mix of evolving regulations and incentives. These include issuing national guidance; tracking indicators to assess how well the financial system serves the whole population (through investment in infrastructure, manufacturing and under-served groups); and using central bank policies and tools to direct capital towards strategic sectors such as elderly care, the green transition and inclusive finance. These measures aim to expand access to finance for groups that are often underserved, including micro-enterprises, farmers and low-income populations.

Implementation

Most regulations operate nationally, though some sub-national authorities can impose FTTs. Given the digital, globalised nature of finance, measures like FTTs require international coordination to prevent regulatory arbitrage. Their effectiveness also depends on well-resourced oversight bodies that are capable of adapting to evolving financial systems.

Impacts

In countries where financial regulations have been stripped away, such as the UK and USA, bank lending shifted away from businesses creating jobs and income toward speculative and environmentally damaging activities — particularly in real estate and financial trading. Unchecked speculation erodes the financial infrastructure that channels capital into productive enterprise, and undermines long-term resilience. 

While there is broad agreement that government intervention can curb harmful speculation, the optimal combination and design of measures remains contested, particularly regarding their effectiveness and unintended consequences.

Challenges

• Distinguishing speculation from risk management: It can be difficult to separate speculative trading from legitimate activities that reduce business risk, especially when they are part of an investment bundle designed through complex algorithms. 
• Regulatory evasion and loopholes: Speculators can evade regulations by moving to non-covered investments or new products, engaging in non-regulated shadow-banking (i.e. lending and other financial activities conducted by unregulated institutions) or relocating operations to countries with more lax regulations. 
• Disproportionate compliance costs: Smaller financial institutions face significant compliance burdens from new regulations; this can strain resources and potentially disadvantage them relative to larger institutions.
• Implementation complexity: With the increasing opacity and complexity of financial products and the rise of shadow-banking, regulators can also struggle to keep updating their strategies and implement them effectively. 

Reference and further reading 

• New Economics Foundation discusses the negative impacts of financial deregulation and reflects on EU regulations. 

• Wikipedia tracks regulations around the world relating to cryptocurrencies, and provides background and examples for financial transaction taxes. 

• Ann Pettifor exposes the harms of uncurbed financial speculation and suggests ways for governments to take back control of the global financial system in The Global Casino (paid access only).

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