
Why a Transaction Fee Matters to You - rberger
http://davidbrin.wordpress.com/2013/02/10/why-a-transaction-fee-matters-to-you/
======
acslater00
This is a terrible idea that for some reason keeps cropping up again and
again. The major problem facing the Global Financial System(tm) is not high-
frequency trading, it is large, illiquid, unhedged assets held by systemically
important financial institutions. The nature of an illiquid asset is that it
is traded infrequently, which makes it especially un-affected by a transaction
tax.

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.

~~~
svachalek
What exactly are these large, illiquid, unhedged assets? Bad mortgages?

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.

~~~
acslater00
Bad mortgages are one type of large, illiquid unhedged asset, yes. But my
general point is that the main danger to large institutions is a huge asset
that loses value very quickly and can't be easily sold. If you accumulate too
many of those, other banks can lose faith in your ability to meet short-term
obligations, and then you're essentially up the creek. That is exactly what
happened during the 08 panic.

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.

------
skorgu
The problem is that any transaction fee is going to be strongly lobbied
against and if it passes will likely have loopholes. I'd prefer a simpler
structural change that isn't tied to a specific wording or implementation
(like modifying the tick size/sub penny rule[0]).

[0]
[http://marginalrevolution.com/marginalrevolution/2012/06/hft...](http://marginalrevolution.com/marginalrevolution/2012/06/hft-
versus-the-sub-optimal-tick.html)

~~~
kylebrown
Thank you, came here to mention the penny-spread regulation. It's a little
known fact about HFT that the reason speed is the primary advantage, is
because the exchanges don't allow orders at prices which are fractions of a
cent, and its first-come first-serve at each price point. The minimum spread
permitted on the NYSE was 1/16 of a dollar (6.25 cents) until 2001, when the
SEC forced all exchanges to the "decimal system". So now the minimum permitted
spread is one penny.

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".

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jrockway
Where is the evidence that HFT is affecting anything? History had plenty of
bad market crashes long before computers were a twinkle in anyone's eyes.
(South Sea bubble, anyone?) And HFT didn't corrupt Enron and Worldcom's
leadership, or robo-sign a bunch of bad mortgages.

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.)

~~~
svachalek
HFT is not just a risk of synthetic crashes, it's essentially a tax collected
by private companies. I say I want to buy XYZ, you run in front of me and buy
the last XYZ at that price and kindly offer to sell it to me for just a trifle
more. Why thank you for providing me such a fantastic service.

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.

~~~
anonymoushn
Do you have any evidence that the business model of any particular HFT firm
involves front-running? If so, you should probably do something about it
beyond leaving comments on the internet. Front-running is, of course, against
the law.

5 or so years ago a large number of your counterparties were probably
algorithmic market-making strategies.

------
gaika
HFT serves the same purpose that human Market Makers and Specialists do, only
better. Kill it, and you will end up paying more.

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?

~~~
seeingfurther
There have been studies proving that the majority of HFT traders are net
liquidity 'takers'. The notion that HFT provide liquidity is false but the
industry still propagates the myth to main street.

Have a look at a recent paper: [http://www.bankofcanada.ca/wp-
content/uploads/2012/11/Brogaa...](http://www.bankofcanada.ca/wp-
content/uploads/2012/11/Brogaard-Jonathan.pdf)

~~~
gaika
It is an ecosystem, of course traders with fast computers would try to fill
all the niches they can. Take a look at a broader picture: <http://www-
rcf.usc.edu/~lharris/ACROBAT/Zerosum.pdf>

Is suspect those in "Panel C: Losers who expect to profit from trading but
will not" are complaining the most.

~~~
seeingfurther
You're citing a very old paper that makes no mention of HFT? Not sure I follow
the reasoning for the citation.

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.

------
daemin
It's interesting to note that the effect of this transaction tax would be to
'reduce volatility' in the market. I say this because recently I watched the
Authors@Google video of Nassim Nicholas Taleb
(<https://www.youtube.com/watch?v=S3REdLZ8Xis>) where he stated that
volatility in the market place is a good thing, creative destruction and all
that.

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).

~~~
AnthonyMouse
I think it's important to distinguish between volatility within a market (e.g.
hog futures) and volatility in The Market, meaning the whole economy. The
first is perfectly normal and its absence across the economy would be very
strange if not dangerous.

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.

~~~
daemin
My understanding of the point in the video is that the volatility resulting
from the systematic risk is a symptom of the market not having enough
normal/baseline volatility to clear out the dead wood, so to speak. Quite
analogous to forest management, where more smaller fires clear out the fuel on
a regular basis so that a large scale fire cannot occur.

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.

------
rayiner
I don't know why techies dislike HFT. If anything HFT is helping to slim down
Wall Street, replacing human traders with computers.

~~~
PavlovsCat
Why accept gaming markets for profit, instead of honest work for profit, at
all?

~~~
rayiner
Traders don't "game markets" for profit. They're part of the infrastructure
that makes markets work. It's like saying E-Bay "games markets for profit"
because they take a piece of every transaction. Being an intermediary !=
gaming the market.

~~~
PavlovsCat
Oh? How can something like this happen then? Did some people just loose track
of the mission of helping everybody out and whatnot?

[http://www.eurolabour.org.uk/Call_for_EU_action_to_stop_fina...](http://www.eurolabour.org.uk/Call_for_EU_action_to_stop_financial_speculation_linked_to_African_famine)

 _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._

~~~
rayiner
How does what happen? A drought led to reduced supply and higher food prices.
That's exactly what you'd expect in an efficient market. People blame the
traders because they're the mechanism through which the market incorporates
the fact of the drought.

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...)

~~~
dochtman
Also, ethanol.

------
consz
As someone currently in HFT, I think a financial transaction tax would be very
good for me/my firm.

~~~
sirclueless
Can you explain why? Or is that part of your secret sauce.

~~~
consz
The same reason McDonald's would benefit with a tax of 10 million dollars for
all restaurants. It would eliminate a large swath of weaker competition and
they would make more profit with reduced competition.

------
meric
That's a terrible idea. Destroying liquidity and masking market volatility.
You don't destroy your clock when upon looking on it you figure you don't have
enough time. The clock is the only thing telling you time is running out.

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.

------
dfc
If anyone can find a link to the Joint Committee on Taxation's report for the
Financial Transaction Tax (AKA: Securities Transaction Tax / Tobin Tax) it
would be much appreciated. The ProPublica article[1] and Defazio's press
release[2] mention the JCT report but I have not been able to locate the
actual report. It is even referred to in a CRS report[3] but it seems that
everyone is taking Defazio's word and nobody is bothering to look for the
report. I scoured the jct.gov website but could not find the publication
listed anywhere.

[1] <https://www.propublica.org/thetrade/item/the-03-solution>

[2]
[http://www.defazio.house.gov/index.php?option=com_content...](http://www.defazio.house.gov/index.php?option=com_content&task=view&id=736&Itemid=70)

[3]
[http://www.hsdl.org/?view&did=715463](http://www.hsdl.org/?view&did=715463)

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cincinnatus
HFT is an abomination. Anything that will curtail it is good in my book.

