Individuals and businesses make numerous payments every day. They sometimes have choices about what forms of payment to make or accept, and at other times are effectively forced to use a particular form. Often there is an asymmetric power relationship between payer and payee that raises the issue of whether one side unfairly exploits the other. Is it unethical exploitation for an employer to pay employees with a fee-laden payroll card over other more convenient forms of payment? Does the fee (...) structure of payment networks such as Visa and MasterCard unfairly exploit merchants? The bitcoin payment system is an ethical as well as technological evolution as it was designed to be an electronic payment system that does not rely upon trust. Can an entire payment system like bitcoin be “evil,” as charged by Krugman? Payment tools as such are ethically neutral, but can be used in an ethical or unethical manner. (shrink)

Recently there has been an outpouring of consumer frustration over rising food and energy prices. Many politicians railed against “speculators” who allegedly drove up the prices of key necessities. Is speculation unethical? This article reviews the traditional arguments against speculation. Many of the standard criticisms confuse speculation with gambling. In much the same way as ethicists now draw distinctions between usury and normal business interest, we draw a distinction between socially useful speculation and gambling. Gambling involves taking on risk with (...) no plausible expectation of making a profit. Gambling may provide entertainment value to some people, but like other addictive activities causes grave harm to a subset of users. Speculation involves taking on a business risk with a plausible expectation that a profit will result. Speculators provide an important risk bearing service by taking on risks that others do not want. They help markets to function better by helping to incorporate information into prices as well as providing liquidity. Speculators may actually reduce shortages by causing quicker price increases that motivate producers to increase production and consumers to conserve. But even socially useful speculation may have an ethical dark side. Does such speculation cause damage by adding excess volatility to prices? Speculators may contribute to price bubbles. At what point does legitimate speculation become odious “price gouging?” We also draw an ethical distinction between speculation, which seeks to benefit from changing prices, and manipulation, actions taken to push prices away from their economically appropriate levels. (shrink)

This paper examines the ethics of contemporary managerial compensation in the context of executive stock options. Economic considerations would dictate that executive stock options should be adjusted to eliminate the effect of overall stock market movements which are beyond the control of the executive. However, in practice, most executive stock options are not adjusted to control for these outside factors. Agency considerations are the most likely culprit. Adjusting for the influence of outside factors, such as a generally rising stock market, (...) from executive stock options sets a higher bar for managers to reach. Furthermore, traditional accounting standards permitted firms that did not adjust options to avoid reporting options as expenses. This presents CEOs and boards of directors with a major ethical dilemma. On the one hand, their duty to their shareholders and stakeholders dictates that executive stock options should be adjusted to eliminate outside noise from unrelated movements in the overall stock market. However, financial statements are presented in the language of accounting. If the overwhelming majority of the users of a language define a particular item in one way, then to deviate from the norm implies that the recipient of such a deviant statement may not properly interpret the statement. Likewise, if the standard practice is for firms to use unadjusted options and thus under-report expenses, to deviate from this industry norm risks that users of financial statements would not properly interpret the financial statements, with perhaps negative consequences for the shareholders. In short, if "everyone else does it," then it could be wrong for an individual firm to deviate from the norm as that would harm the shareholders. (shrink)

The controversy over short selling has continued unabated from the introduction of modern equity trading in Amsterdam in 1610 to the present day. Nevertheless, the business ethics literature has not really addressed short selling. Short sellers not only profit from the misery of others, they also create it through their selling activities. However, they also provide a socially useful service by making prices better reflect true values, protecting other investors from purchasing overpriced securities. Short sellers can also help to provide (...) liquidity in the markets. Recently, there has been a hue and cry against so called "naked" short selling, which involves not delivering the shares that have been sold. This gives manipulators a tool for depressing stock prices and deprives purchasers of voting rights and potential stock lending revenue. Naked short selling creates ethical issues for short sellers, buyers, brokers, market makers, and regulators. Is it ethical to exploit a legal loophole that permits sellers to sell stock and delay delivering shares indefinitely? (shrink)

Recent concern over “high frequency trading” (HFT) has called into question the fairness of the practice. What does it mean for a financial market to be “fair”? We first examine how high frequency trading is actually used. High frequency traders often implement traditional beneficial strategies such as market making and arbitrage, although computers can also be used for manipulative strategies as well. We then examine different notions of fairness. Procedural fairness can be viewed from the perspective of equal opportunity, in (...) which all market participants are treated alike. The same rules apply to HFT as to other traders. Another approach to fairness is in the equality of outcomes. Many HFT strategies are beneficial to other market participants, so one cannot categorically denounce the practice as unfair. Other strategies, for both high and low frequency trading, are not. It is thus important to distinguish between the technology and the use of the technology to make judgments on fairness. (shrink)

What are the ethical obligations of the sellers of financial products to their customers? Stockbrokers in the U.S. have a legal and ethical requirement to recommend only “suitable” investments to their customers. This is a fairly weak standard. Currently, there are proposals to raise the standard to a fiduciary one in which the recommendations would have to be in the best interests of the clients. Brokers sell solutions to financial problems. Similar to an auto mechanic or a doctor, the product (...) often consists of both the professional advice and its implementation. There are numerous conflicts of interest between brokerage firms and their customers in that the products that pay the highest commissions may not be the best ones for the customers. The societal perspective adds complications, however. Society depends on modern financial markets to raise capital for productive enterprises and to spread risk. Issuers of financial products need distribution channels for their products just like the producers of any other products. Commissions create powerful incentives for the distribution channels, but at the same time produce conflicts of interest—a type of ethical pollution. Just as our society tolerates some pollution as a byproduct of other useful activities, it may be useful to tolerate some of these financial conflicts of interest. The nature of the relationship should govern the ethical standard. Those selling advice, regardless of how they label themselves, should adhere to a best-interest fiduciary standard. More limited relationships should be limited to the mandate involved in the relationship. (shrink)