Is the City of London a casino? And are its activities "socially useless", as Adair Turner alleged in 2009? Indeed, are they so socially useless that we should impose extra regulations on them and force them to move elsewhere?
The truth is that a wide variety of financial services share an embarrassing characteristic with gambling: they involve taking substantial risks. Customers are charged either for the kicks they get from dreaming about potential winnings or for the safety they enjoy from avoiding possible losses. Even worse, much of the income earned in modern finance is rather dubious. It consists of such items as trading profits (from buying and selling securities or currencies with third parties, with the deliberate intention to make a profit at the expense of those third parties), and an assortment of fees and commissions, the pricing of which almost inevitably leads to negotiations of some sort. The negotiations are often as undignified as in an oriental bazaar.
London is, for example, the world's leading centre for foreign exchange trading. When a big multinational asks its bank to use its £1 billion sterling balance to buy $1.6 billion of dollars (at the current exchange rate of $1.6 to the £), the bank typically will not have the $1.6 billion of dollars on its own balance sheet. It has to take a risk to achieve a profit. Specifically, after selling the dollars to the multinational it must acquire dollars at a lower price than the 62.5p in this transaction (i.e., the inverse of 1.6 multiplied by 100) or face a loss. It does not take a mathematical genius to see that if it buys the dollars at, say, 69.4p (i.e., an exchange rate of $1.44 to the £) it will lose over £100 million.
The foreign exchange market is a casino in which the proprietors need to be on good terms with a large number of diverse customers, so that the risk (of losing over £100 million on a fairly routine £1 billion trade) can be removed from the balance sheet quickly and with little fuss. After helping its multinational customer, the bank sets about either borrowing the $1.6 billion of dollars, perhaps from other banks, or sells a sterling asset (on its balance sheet for £1 billion) for, say, $1.605 billion (with the dollar implicitly valued at 62.3p). The bank has then provided a foreign exchange service to the multinational and pocketed $5 million for its stakeholders.