Why a Transaction Fee Matters to You
davidbrin.wordpress.com
davidbrin.wordpress.com
OTOH, a tax like this may discourage high-frequency trading [despite it not being at all a systemic risk], but it also discourages certain legitimate and extremely useful forms of hedging, such as large notional currency swaps [http://en.wikipedia.org/wiki/Currency_swap]. And in the likely event that some esoteric forms of derivatives are exempt from the tax [they may be executed overseas, or just be exempted from the statute due to lobbying pressure] then it will encourage banks to shift trading activity from actual assets to much-more-fragile derivatives.
Bottom line: it's very likely that the net result of any Tobin Tax type implementation will be to actually make the Global Financial System(tm) more dangerous. And that's assuming you can actually discourage HFT, which is not at all clear. It will probably just migrate to some island that sets up a tax-shelter exchange.
I have no great love for HFT, but this proposal is the epitome of dangerous, populist feel-goodery. It makes no regulatory sense, and the fact that the Europeans keep threatening to hold hands and jump over this cliff together should not make you think that it is in any way good public policy.
Who would shift trading from assets to derivatives? It's my impression that HFT traders make money from HFT; that is there is no "core" business that would continue without HFT. I'm also not clear how they're supposed to HFT the derivatives from another country when apparently every foot of cable counts.
As for #2, the main way trading shifts from assets to derivatives is this template: the government says I have to pay a tax if you sell me one share of AAPL. Instead, you sell me a contract that says, "if the price of AAPL changes by $X, I will give you $X. This is financially equivalent to a sale of AAPL stock for both parties, but does not require you to transfer ownership of a share of AAPL stock, and so you can avoid the transaction tax. Even if the US tries to impose the transaction tax on the derivative, it can be moved offshore, and thus avoid the tax.
What I just described is a simplified version of a Contract For Difference (CFD), as mentioned by another commenter. But there are innumerable other sorts of derivatives that could accomplish the same basic purpose.
[0] http://marginalrevolution.com/marginalrevolution/2012/06/hft...
If the exchange allowed orders at prices which are fractions of a penny, then algorithmic trading systems would have to compete on price as well speed. But it would also narrow the spreads, which would mean less profit for the "market makers".
Also worth noting is that equity markets are a tip of the iceberg: there are also foreign exchange and bond markets. If anything, charging transaction fees will suck up liquidity in the secondary markets, causing bond issuers to have to raise rates to compensate for the illiquid secondary market. (And in the case of treasuries, guess who pays the extra interest? Not Wall Street: you.)
I've never seen anyone else in the markets proclaiming how great it is that we have HFT providing liquidity, not like the bad old days 5 years ago or so, when it was so very difficult to push a market order through. It's always the HFT companies themselves insisting how vital they are.
5 or so years ago a large number of your counterparties were probably algorithmic market-making strategies.
Did you complain when human travel agents were replaced by expedia and like? Would you complain if car salesman as a profession is gone? Do you see your profit when amazon is competing with all brick and mortar shops? What makes HFT so special in that list?
So strange to see that sentiment from a science fiction author. Afraid to lose to reality evolving faster than you can imagine?
Anybody who's making a profit is almost by definition making the markets more efficient and less volatile. They buy when the price is low (pushing it up) and sell when it is high (pushing down).
You can open up your own ECN and offer fixed auctions every minute if you think this will attract people who feel cheated by HFT.
Have a look at a recent paper: http://www.bankofcanada.ca/wp-content/uploads/2012/11/Brogaa...
Is suspect those in "Panel C: Losers who expect to profit from trading but will not" are complaining the most.
No one is saying that speculative traders don't serve a function in the market place. However you said "HFT serves the same purpose that human Market Makers and Specialists" when it has been proven they don't. HFT want you to believe that they serve some altruistic purpose to the marketplace to legitimize their existence. The truth is that HFT serves as a quasi-tax on each and every share traded because to execute a trade in today's marketplace non-HFT volume almost invariably passes through the hands of HFT volume thereby shaving pennies of profit off each trade.
They're missing 90% of the picture.
HFT have no such obligation, so they can create liquidity and remove it whenever they want. They caused the Flash Crash in 2010 by removing a large amount of liquidity when the markets needed it the most.
If HFT were forced to maintain liquidity like real market makers and specialists, then I would have no qualms with them. But they want to have their cake and eat it too, they say they provide liquidity but only when it's convenient for them, and that is the part that is total BS.
More precisely the point he made was it was good for the market to appear and be volatile because otherwise it would only appear stable but with high and disasterous volatility brewing underneath the surface, ready to explode (the great moderation and subsequent GFC in the video).
The second one is the problem -- when it happens it's because you're on the losing side of a systemic risk. It isn't that hog futures go up or down but everything is still fine for normal people because the DJIA only moves by a tenth of a percent, it's that some jackass causes a panic and a trillion dollars disappears out of the economy for no good reason. The latter is something everyone should want to prevent, which is why all the talk at the individual level about diversification and hedging. But the same goes at the macro level: We need to "diversify" the banks and major industries so that no individual company is too big to fail anymore, so that we can have volatility within specific industries without it breaking the whole world economy.
And the sort of volatility HFT creates is the second kind. When something bad happens, it happens across the board, regardless of the "fundamentals" of the underlying industries. Even when it's "working" the result is only to transfer wealth from ordinary stockholders to high frequency traders, which is a net loss for anyone who isn't a high frequency trader.
Now it is probably the case that the HFT traders make The Market far more intertwined than is sensible, and hence far too combustible as a whole. In the video Taleb points out that he favours many smaller organisations over fewer larger ones for the simple fact that within an ecosystem a few small systems can fail with little negative effects on the whole. Where as if a large system fails it is far more catastrophic.
So perhaps the solution here is to make some sort of upper limit in financial (HFT, Banks, etc) firms so that there would be more smaller ones, where failure would be more common and the destruction of smaller companies should not disasterously affect the system as a whole.
That said, the recent wiping of trillions of dollars in value, seemed to be an effect of the many years of apparent calm. With a lot of companies creating new derivatives with the appearance of safety but were anything but safe.
To bring it back to the parent article, I do agree that everyone on the exchange should be paying some sort of transaction fee, I have to pay one when trading shares, and so should other traders.
http://www.eurolabour.org.uk/Call_for_EU_action_to_stop_fina...
2011-09-15
The European Parliament has called for changes to EU law to stop food price speculation that has been linked to the famine that has claimed tens of thousands of lives in East Africa.
A hard-hitting resolution adopted by Euro-MPs on Thursday 15 September calls for changes to EU directives on market abuse and financial trading to stop "abusive speculation" which has been identified as a contributing factor to the current famine in the Horn of Africa.
While it is widely accepted that the humanitarian emergency in the region was triggered by drought, a recent World Bank report identified high food prices as a key contributing factor.
Academics and international development charities working in the sector believe that food price volatility caused by speculation in agricultural derivatives on the financial markets are exacerbating the situation.
You see the same crap-throwing with traders in oil. People blame the traders for "bidding up" oil prices. The traders are just helping the markets reach a price--it's the market that's bidding up oil prices. And that's exactly what you'd expect when India and China are guzzling up the stuff but production has been flat since 2005 (and we hit peak discovery in 1965...)
See Planet Money's fascinating deconstruction of the rice "shortage" from a couple years ago:
http://www.npr.org/blogs/money/2011/11/04/142016962/the-frid...
I know nobody wants to pause their high-speed HN binge for the seeming eternity it takes to listen to a podcast, but I promise you will not regret this one.
Now obviously markets are not zero-sum games, but there is theoretically only a certain amount of growth returns available and some of this is being siphoned off. Couple this with the idea that the purpose of the markets are to most efficiently distribute capital to where it can be best used in the real world, HFT does not seem to be improving much.
What you have to do instead is legislate and enforce transparency in all global organisations and put in jail high level executives who (may have) turned a blind eye to deliberate borrower misrepresentation (may be fraud) in investment banks and which on-sold those loans on to investors, knowing the risk of those loans were understated.
[1] https://www.propublica.org/thetrade/item/the-03-solution
[2] http://www.defazio.house.gov/index.php?option=com_content...