With all the talk of evil speculators ruining Hong Kong's financial markets, it is time to make a crucial distinction between speculators and manipulators. Speculators are nasty people with greasy hair and shifty eyes who make themselves undeservedly rich by driving up prices so that ordinary people like you and I can no longer afford the things we need. Isn't that right? Then here is a question. The last time you bought into a mutual fund or unit trust, was it because the fund paid money every now and then or because you thought the price would go up? The price, was it? You nasty speculator. Now get some shampoo for that greasy hair and promise that the next time you have a little spare money you will put it in a bank deposit for an honest, steady interest income and not go out again looking for money you did nothing to make. The Oxford dictionary defines speculation in business as 'make investment, engage in commercial operation, that involves risk of loss.' The definition is good as far as it goes, but it needs to be revisited. All business activities carry some risk of loss, even placing deposits with banks. Just ask people who deposited money with BCCI before it went bust a few years ago. Yet we would not call these depositors speculators. A more refined definition, to which most people would subscribe, is seeking to benefit from changes in the market price of an investment rather than from an income stream generated by that investment. But whether you take the Oxford dictionary or play with the definition, a little thought will reveal that selfish intention is not enough to define speculation and that it is an activity practised by almost everyone. It is also a useful activity in financial markets. For one thing, it provides needed liquidity. If speculators did not contribute to the turnover on the stock exchange it would take much longer for investors to buy or sell stocks and the prices would more quickly move against them. In addition, it can eliminate anomalous pricing. HSBC Holdings, for instance, is quoted in London and Hong Kong and sometimes the prices in the two cities vary. Certain speculators, called arbitrageurs, make their living selling the one and buying the other until the prices come back into line. And in some commercial activities, speculation removes financial risk from people who are better suited to doing other things. In the Hong Kong residential property market, for instance, developers sell new flats off architects' plans more than a year before they are completed. Speculators who buy these for a down-payment provide money for construction of the buildings and take market risk (often a considerable one) from developers, who then can get back to their real business of building yet more flats. Manipulators are a different breed. These are speculators who rig markets to create an unfair advantage for themselves. The best example is company directors who deal on inside information. They manipulate by withholding crucial information from other investors until they have themselves dealt and can then benefit when the news is released and prices go up or down. The form of manipulation from which Hong Kong has suffered recently is somewhat more complicated. It involves big foreign funds and investment banks who withheld information that they were required by law to divulge and who used the massive amounts of money they have built up to manipulate a narrowly based Hang Seng Index while orchestrating scares in a thin currency market. Let's be fair to them. Some of them did it because they were truly convinced that Hong Kong investments are mispriced, which is an entirely legitimate reason for speculating. But let's also make the distinction. They were not content with speculating alone. They also manipulated the markets to benefit from their speculation and this is why the Government found their activities so objectionable.