
The Need for a Tax on Financial Trading - hvo
http://www.nytimes.com/2016/01/28/opinion/the-need-for-a-tax-on-financial-trading.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region
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tomp
Because barriers to trade have worked so great in the past...

This is just another fluff piece without too many rational arguments, based on
a completely irrational fear of HFT. Arguably, HFT and hedge fund have made
the markets much more micro-efficient in the past decades (as wittnessed by
the difficulty of finding new arbitrage opportunities); we have to thank the
central banks and big institutional investors for macro-inefficiency.

> one that applies a tiny tax rate to an array of transactions and is split
> between buyers and sellers

I think the current situation, where exchanges basically "tax" those who take
liquidity and reward those who provide it (i.e. the fee of a market order is
split between the exchange and the person who entered the limit order) is much
better at providing stability to the market.

> which generate windfall profits on small and fleeting differences in prices
> at the expense of ordinary investors and market stability

Well, the idea behind is that prices (e.g. same stock on different markets)
should converge. If you don't want that, by all means, tax the market.

> The burden of this tax would be concentrated at the top, because that’s
> where the ownership of financial assets is concentrated

Nope, it doesn't matter where _ownership_ is concentrated. What matters is
where _trading_ is concentrated. E.g. HFT or every time you get paid and
invest a portion in your income in a stock index-backed pension scheme.

~~~
mabbo
I think the worry about HFT is mainly that the value to society of adding
liquidity does not outweight the cost of the money being extracted by these
companies. It doesn't feel like a good deal- it feels like we're all being
cheated.

The hard part about analysing whether is actually is good is in trying to
figure out just what value we should place on added liquidity.

Can you explain why the value to society of the additional liquidity from HFT
outweighs the cost (large profits to companies doing nothing else)? Not being
facetious, actually interested in hearing your thoughts on it.

~~~
ConfuciusSay
Except that even the Fed now admits that HFT's only add liquidity precisely
when it's least beneficial (when nobody needs it) and reduces it when it's
needed.

Don't buy into the HFT "adding liquidity" myth.

~~~
phil21
Yep. At risk of adding a "this" comment I've spent years reading on the
subject, talking to some of our customers who are HFT, and generally just
thinking and learning about it.

I still can't figured out a single value-add they bring to the table, much
less to justify their insane compensation or the incredible technology budgets
they carry. It's simply sad to me to see some of these brilliant minds (at
least on the tech side where I interact) essentially engaged in ripping off
fellow citizens at worst and rent-seeking at best.

Of course if you engage them, they will get all hand-wavy about "liquidity" \-
but I think it's striking that not a single person I've talked to has been
able to distill the benefit they bring to society in a simple sentence or
paragraph. It always ends with the "most people can't understand" which as I
get older I've learned is a euphemism for either "I don't know" or "I don't
want to tell you the truth".

Either way, so many billions of dollars taken from the economy and put into
useless activity. Absolutely no one will be able to convince me we need
millisecond-level liquidity for markets to function efficiently.

~~~
tomp
HFT don't provide liquidity for liquidity's sake. They make markets more
efficient, i.e. closer to the "one true price" (not necessarily the fair
price, because there's no way HFTs can outbid all the money collected in
index/sovereign founds or printed by central banks). They also reduce the
spreads. For an ordinary person, they improve the markets.

The complaint about "brilliant minds being wasted" rings true, but you could
make the same complaint about all of finance, and even most of Silicon Valley
focused on extracting rents by serving ads - both are ultimately zero-sum
games where insiders profit at the loss of society.

I think the ultimate problem is, there are no _real_ problems that smart
people could work on and make a contribution (and earn a good living) - or at
least I don't see any.

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vostok
It's not hard to see who benefits from these taxes. You avoid the tax by
trading a swap/CFD/forward (outside the U.S., if necessary). This means that
your market maker is a bank instead of an HFT firm. More of the order flow
becomes internalized so there's less incentive to post competitive quotes on
public exchanges. I think it's very telling that many of the articles talk
about the evils of HFT without addressing internalization.

It's true that this type of tax can easily be avoided, but the real problem is
that it incentivizes trading to move from public exchanges to banks' walled
gardens.

~~~
kolbe
This is true. I'm consistently amused at how the transaction tax gets
advertised with "BANKS HATE THIS," when banks would love it. And when banks
love something, you better believe that it's not in anyone else's best
interest.

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yellowstuff
I have trouble believing this assertion from the NYT:

"[HFT] generate windfall profits on small and fleeting differences in prices
at the expense of ordinary investors and market stability"

Considering this fact:

"TABB Group estimates that US equity HFT revenues have declined from
approximately $7.2 billion in 2009 to about $1.3 billion in 2014."

Source:
[https://www.fas.org/sgp/crs/misc/R43608.pdf](https://www.fas.org/sgp/crs/misc/R43608.pdf)

So the profit of the entire industry is a rounding error, but they're somehow
fleecing everyone? And they provide tiny spreads, which clearly benefits
individual investors.

The NYT article says a FTT is necessary to protect from HFT, but they don't
really have evidence of that. The study they link makes the case that a FTT
would raise lots of revenue without distorting trading too badly, but admits
that the effect on market volatility is unclear. But raising taxes so that the
government makes more money is not going to be as good a slogan as raising
them to punish some hyped-up evil doer.

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ohyes
This is a stupid way to get a progressive tax system. If you want a
progressive tax system just do it and don't mess around with complicated
schemes to avoid the political consequences of it. Tax the wealthy at 60-70%
and everyone else at 30-40% and provide decent social services and be done
with it.

~~~
sageikosa
...and a huge bureaucracy so that we can be certain that the social services
are decent (since we won't be able to gauge efficiency or utility by supply
and demand market pricing)...then huge organized labor and pensioning systems
to attract and vest people into a system...

Since we already have these last two, then taxing the wealthy seems like a
good way to go, except that you need to expand the concept of wealthy to
actually make enough money; all the while the "wealthy" will find ways to
protect their wealth.

It might be easier to simply print more money and give it to government
agencies, but then other nations will probably value your currency less due to
inflationary bloat.

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elecengin
The trading tax has been hanging over the heads of traders for a long time
now. I almost wish they would just create a proper experiment to test it and
then repeal it after it inevitably fails (see Sweden for a prime example).

The SEC seems to enjoy "experiments" \- the large tick pilot (testing
variations on requiring some small cap stocks to trade in increments larger
than a penny) is an example of a massive upcoming one. While the large tick
pilot suffers from many things - a huge cost to brokers for a dubiously
structured experiment - at least it shows a willingness for the SEC to attempt
structured experiments. This should be no different.

P.S. For those interested in Sweden - a report considering a transaction tax
in Canada that discusses it:
[http://www.publications.gc.ca/collections/Collection-R/LoPBd...](http://www.publications.gc.ca/collections/Collection-R/LoPBdP/BP/bp419-e.htm)

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cheatdeath
It's interesting people always cite the UK's stamp duty on share transactions
as an example for how to stop high frequency trading. The rate is 0.5% when
buying and 0% when selling. Market makers (of which high frequency traders are
a subset) do not pay this.

[http://www.legislation.gov.uk/ukpga/1997/16/section/97](http://www.legislation.gov.uk/ukpga/1997/16/section/97)

Edited extract:

"Stamp duty shall not be chargeable on an instrument transferring stock of a
particular kind on sale to a person or his nominee if— (a)the person is a
member of an exchange (b)the person is an intermediary"

"an intermediary is a person who carries on a bona fide business of dealing in
stock and does not carry on an excluded business"

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kasey_junk
> However, individuals who buy and hold investments, including those who
> invest in index funds that trade infrequently

Wait, how is that possible? Are the underlying trades that make up the index
not taxed? Do the funds receive some sort exemption? If so, how do I become an
entity like that?

Seems to me that as an "average" investor I'm going to get taxed 3 times now.
The underlying index trades, my own entry and exit from the index and on the
gains from the trade (hopefully). Wouldn't it be simpler to just tax the gains
as we do now at a higher rate?

[Later] On second thought this is even worse for folks like me (whether I
count as "average" or not I don't know). Most of my trading portfolio exists
in the form of index funds in tax deferred accounts. My long hold of those
index funds now acts as a back door for lots of taxation that is less obvious.

~~~
vanviegen
The difference is that individual investors will often hold on to their shares
for months or years, rendering the trading tax insignificant.

The tax is targeting (very) short-term professional traders, selling and
buying back shares multiple times a day (or per second, in some cases). This
type of trading adds little value to the useful allocation of capital, and
imposes a 'tax' on other traders.

To me, that sounds like as good a thing to tax as any. Besides, I'd guess that
implementation of such a tax would be relatively straightforward, as far as
taxes go.

~~~
kasey_junk
Except if I'm "holding" an index I'm not really holding anything. An index is
made up of lots of trades over time.

I'm dubious about every part of your argument, but even if I weren't it still
doesn't hold that long term index "investors" aren't impacted by this.

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qpsk88
i never quite understood, why they dropped it. The financial industry claims
they produce products, so when buying selling them sales tax applies. For me
as private investor (in germany) the tax added up to something like 2DM per
year.

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devnull791101
FTT's are bad. There are no models which show that they generate any revenue
having been extensively researched in both the EU and UK. The basic rule is
that the more you tax something the less of it occurs. FTT's are not only
extremely expensive taxes to administer they also reduce overall economic
activity and have been overturned everywhere they have been tried.

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dovdov
also ex high speed trading supercomputers for sale

~~~
brianwawok
Except most expensive trading stuff is ASICS and microwave links and low
latency switches and stuff... not that many trading strategies need the
supercomputer to run, as the math is pretty simple.

