
The gargantuan stupidity of the financial transactions tax - ghosh
http://pando.com/2014/03/13/the-gargantuan-stupidity-of-the-financial-transactions-tax/
======
rayiner
The opposition to HFT here is hilarious to me. HFT and computerized trading is
nothing more than the automation of the very lucrative trading industry. Do
HFT firms make a lot of money? Sure. But it's coming out of the pockets of
traders who in the aggregate would make even more. Its automation
concentrating wealth but reducing overall costs, as usual.

~~~
crdoconnor
>Sure. But it's coming out of the pockets of traders who in the aggregate
would make even more.

i.e. traders like pension funds, who will end up passing the costs on to
pensioners.

~~~
tptacek
How actively to pension funds trade? The HFT squeeze harms people who jump in
and out of positions quickly. Don't pension funds buy and hold, and thus
benefit from reduced transaction costs? One of the hardest things to do in the
market --- shopping huge blocks --- is simultaneously something HFT is good at
_and_ something that inflicts costs on institutional buy-and-hold investors.

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gd1
"In fact, we can show that the spreads must widen to be larger than the tax
itself being applied. If there’s a tax of 3 bps on a trade then no one’s going
to trade at a spread of less than 3 bps."

6bps. To market make a spread you have to buy AND sell. Tax is charged twice
at each end.

The intermediaries are charged the tax twice, which means the end consumer
(investors, pension funds, whatever) will be charged (at least) three times.
Once directly, and twice indirectly because market makers will have to widen
their spreads by at least that amount.

~~~
another-one-off
Bit of a red herring to say this matters to individual investors though -
compared to income tax it is meaningless, and if the share is expected to pay
long term dividends it is not big.

It discourages day-trading on stock, but it won't do too much damage to
mid/long term investors. It might actually encourage companies to make good
mid-long term decisions.

 _EDIT_ and the two endpoints can trade directly with a spread smaller than 6
bps if they are that price sensitive.

~~~
gd1
What do shares have to do with anything? They are a small part of the picture.
The spread on the e-mini S&P is currently 0.25, and it is trading at 1800. So
1/7200 is roughly 1.5 bps. This will increase the spread by (at least) 6 bps
to 7.5bps, then charge you another 3. So spreads five times bigger. Instead of
trading say 1810.00/1810.25, it will be trading 1810.00/1811.25. Do you get it
yet? No one will trade. And the comical part is that they project supposed
revenues based on current trading volumes.

Also, I've missed the best part so far, when I mentioned that you get charged
three times in my first post, that was just to get into a trade. So end-user
will get charged at least 6 times per roundtrip (twice directly, four times
indirectly through widened spreads).

------
bakhy
Somebody's pretty angry. Gooooood :)

I see no serious argument in this text. I mean, my god, if we tax them, their
prices will rise?! I've never heard of anything like that! :D And everything
is so weakly argumented, just a couple of expert terms are thrown around,
while the majority of the text deals with attacking segments of opposing views
he disagrees with. All in all, very emotional and weak.

And I love his explanation of how this Great Recession came to be. One of the
most manipulatively simplified descriptions I've ever heard.

------
Houshalter
It's a non-solution to a problem that doesn't even exist. The real "problem"
as I understand it is that some people get information sooner than others and
can profit from it, creating incentives to get information faster and faster
even though there is little benefit to the rest of the economy for doing so. I
doubt the total cost is that huge though.

I'm not sure if it's possible to fix that, but one idea would be to do trades
in discrete increments of a few seconds or whatever. Similar to how exchanges
close overnight and companies can release important information, and everyone
can be prepared by the next day when they start trading again.

~~~
another-one-off
Making money from pure trading revolves around information asymmetry, and
ability to store goods - most of the time this is really good, because it
helps to motivate people with clever ideas to put them into practice.

The problem with HFT is that practically speaking, the value of a company
can't change in timeframes shorter than a couple of hours (barring exceptional
circumstances like a big announcement). So a HFT firm is not actually
benefiting from information asymmetry about the product of the company being
traded or real-world conditions, it is benefiting from information asymmetry
about the conditions at the exchange. In theory this is transferring money
from subject-matter experts to experts in how exchange servers & the local
fiberoptic grid works.

I'd be alone in a room of HF traders, but this isn't useful economic activity
vs. subject matter experts making money.

I don't understand all the arguments about 'liquidity', I don't see why a
slight price spread is a bad thing; provided that I can sell stock in an hour
or so. There isn't a magic 'efficient price' determined by the gods of the
market - it is whatever the buyer is willing to pay.

~~~
Houshalter
I don't think that's entirely correct. They are profiting from information
asymmetry. Markets change slightly and they know it 1 millisecond before
everyone else. In that millisecond they buy or sell and profit from the price
change. This is stuff that would have been done anyways by regular traders.
It's just the high speed traders are now faster and so do it first.

As far as I can tell that isn't hurting anyone more than normal arbitrage.

------
bsaul
The general audience ( that includes me ) thinks that high frequency trading
makes easy money out of nothing. But for someone to make money, another's got
to loose. So has anyone heard of hft firms going bankrupt ?

~~~
seanmcdirmid
You are assuming the market is a closed system, but it's not really: you
aren't gambling with other people, instead the capital invested should be put
to productive use. HFT helps with liquidity, though there are probably better
solutions to that problem.

~~~
mattmanser
Honest question, why would liquidity of anything less than, say a week, be
useful?

Same question for a day? An hour? A minute? A second...

~~~
lmm
Suppose we made regular businesses wait an extra week to receive shipments.
What if you had to wait an extra minute to launch a new server on AWS? If a
fundamentals trader has put in an order to buy a stock they've presumably done
so for a business reason and slowing that down slows down their business.

~~~
nodata
I'm sure not automatically trading hundreds of times per second will not
impact their business (unless their business is trading faster than somebody
else).

------
gaius
The interesting thing I find about HFT discussions on HN is the mindset "it's
computers, therefore I fully understand it".

------
ig1
The big problem with the research around financial transaction tax is that
most of the academics working on it are completely clueless - they have no
real idea how a lot of the financial world works operationally in practice.

For example one of the major papers made a estimate for the total daily volume
of the forex trading; it was lower than the volume that a single mid-tier
investment bank would do.

Most papers also ignore standard practices like deal netting that banks do to
reduce organic transaction costs.

------
crdoconnor
He sets up a number of straw men which completely miss the POINT of the
financial transactions tax.

>In very brief form, it wasn’t high speed trading, nor any of >the markets
where that occurs, which led to the crash.

In very brief form, the financial transactions tax is NOT about preventing
another crash (other regulations are needed for this). It's about preventing
HFT operators from effectively levying a tax on the rest of the participants
in the equities market (e.g. pensions and value investors).

>Reducing speculation increases price volatility

Absurd. In fact, high levels of capital flows correlate with financial crises
(i.e. they're a _cause_ of volatility):
[http://www.crei.cat/people/broner/BDES%20pub.pdf](http://www.crei.cat/people/broner/BDES%20pub.pdf)

This can be seen in HFT by looking at the flash crash. Volatility gone nuts.
Did that ever happen before HFT?

>the tax itself will not in fact raise any net revenues

Again it's NOT THE POINT of the tax to raise revenues, it's to discourage HFT:
[http://www.nakedcapitalism.com/2013/11/robin-hood-tax-how-
re...](http://www.nakedcapitalism.com/2013/11/robin-hood-tax-how-reformers-
sabotage-themselves-with-terrible-branding.html)

>and yet will have a cost to both the workers in the form of lower wages and
pensioners in lower pensions.

Not only false, the _opposite_ is true.

The profits that HFT firms make have to come from SOMEwhere, correct? Well,
they come from you. Specifically, large investors (pension funds), insurance
companies, value investors, etc. Other participants in the market.

HFT takes money directly from pension funds who are executing large orders, by
'skimming' off the orders they make. Their profits are not made out of thin
air.

>So an FTT would indeed drive up costs for individual investors making the
>critics correct on this very point then?

Nope. FTT is infinitesimally tiny % of a transaction. Unless you're executing
millions upon millions of transactions a day that's an infinitesimally tiny
amount. In which case you're NOT an individual investor, you're doing HFT...
the exact kind of behavior this tax is intended to cut down on.

>Sigh. The argument is now that it’s not going to cost people very much
>because we’ve decided not to count that cost which is going to be the
>largest for people.

Firstly, HFT WITHDRAWS liquidity precisely when it is needed the most. Most
algos will freeze up during times of market distress. So yeah, they're not
helping when the markets are ACTUALLY suffering from a lack of liquidity.

Secondly, they're adding trading volume, not liquidity. It was never hard to
actually sell or buy a stock before HFT. They're not cutting down on spreads
(that's what market makers do - and HFT is NOT market making).

When the markets are operating normally, they're _already_ very, very, very
liquid (as was the case before HFT). HFT makes little to no difference.

HFT is basically legalized front running. It should be banned somehow because
it is parasitic on the other participants in the equities market. The
financial transactions would cut down on that, but don't expect them to give
up without a fight (as this guy is witness to).

~~~
yxhuvud
> In very brief form, the financial transactions tax is NOT about preventing
> another crash (other regulations are needed for this). It's about preventing
> HFT operators from effectively levying a tax on the rest of the participants
> in the equities market (e.g. pensions and value investors).

Actually no. HFT drive down the costs for pensions and value investors. The
ones that foot the bill is the traders and the market makers that have seen
their margins collapse.

> This can be seen in HFT by looking at the flash crash. Volatility gone nuts.
> Did that ever happen before HFT?

Indeed it did. There was a flash crash in 1962 as well. The reason was similar
- suddenly the market found they were out of buyers.

> The profits that HFT firms make have to come from SOMEwhere, correct?

Sure, but there are plenty of other players in the market that traditionally
have been able to shave a lot more from investors.

As for your comments that HFT is not driving down spreads, there are _plenty_
of evidence that they do. Spreads have collapsed to nothing in the 15-20 years
of operating HFTs.

Mandatory reading:
[http://www.chrisstucchio.com/blog/2012/hft_apology.html](http://www.chrisstucchio.com/blog/2012/hft_apology.html)
Don't miss part 2 and 3.

~~~
crdoconnor
>Actually no. HFT drive down the costs for pensions and value investors. The
ones that foot the bill is the traders and the market makers that have seen
their margins collapse.

As a % of profits gained from HFT, market making is small enough to not even
be relevant. The more profitable strategies involve basically front running
the market.

>Indeed it did. There was a flash crash in 1962 as well.

It took a YEAR for prices to rise again. That is not volatility. Or a flash
crash. That is a CRASH crash.

Wanna know how long it took for prices to rise again after the flash crash? 15
minutes. THAT'S volatility. One year? Eeeeeh, not so much.

>Sure, but there are plenty of other players in the market that traditionally
have been able to shave a lot more from investors.

Yes, it is not the biggest rip off the world (or indeed the equity market) has
ever seen. That doesn't change anything about its fundamental nature, however.

>As for your comments that HFT is not driving down spreads, there are plenty
of evidence that they do. Spreads have collapsed to nothing in the 15-20 years
of operating HFTs.

Spread have declined because electronic trading reduced the transaction costs
of trading.

It ought to be glaringly obvious that anything that happened 20 years ago had
NOTHING to do with HFT. It didn't even exist in a limited form until 15 years
ago and only really took off 5 years ago.

------
millstone
The article did a good job refuting the arguments in favor an FTT, up until
this point:

> In fact, we can show that the spreads must widen to be larger than the tax
> itself being applied. If there’s a tax of 3 bps on a trade then no one’s
> going to trade at a spread of less than 3 bps. Why would you trade for a
> margin less than the tax you have to pay?

Because you think the asset is going to increase in value in the future, of
course!

You might find the article's argument compelling if you are an arbitrageur.
The firms spending millions on microwave antennas to trade a few milliseconds
sooner might be frustrated that transactions with puny spreads are no longer
profitable, due to a .03% tax.

But we (society) swallow far more than that in other markets. How many labor
transactions were rendered unprofitable (aka people choosing not to work) via
income tax? How many retail sales never happened, because of sales tax? And
these tax rates are four orders of magnitude higher than the proposed FTT!

People buying and selling financial instruments is not four orders of
magnitude more important to the economy than is labor, or buying goods. If
anything, it's much less important. So I don't see why financial instruments
should enjoy a privileged tax status.

> Thus all of the revenue from the tax (and as I point out in that paper, this
> will be less than the revenue lost from other taxes as a result of the
> introduction of the FTT) will have its burden, and more, upon end investors.

How? The math doesn't work out! I am a retail investor, in a high income
bracket, and a .03% FTT would cost me $1-2 a month. There's no way you could
get the proposed revenue figures from people like me. I have to conclude that
the majority would fall on investment firms.

The example investors, whose mutual fund does $85k in transactions a year, are
either quite wealthy, or are being taken for a ride.

------
friendzis
Fun fact: banks having to hold to at least 5% of issued loans has led to
market crash. 5% margin on good decisions is just too high for banks. I'd love
to work in a bank, where 5% good decisions is considered achievement and not a
complete ant total dumbassnes.

------
nodata
Why don't they set the minimum trading interval to something larger to
unencourage HFT?

~~~
crdoconnor
That doesn't really help if the HFT firms can simply pay to be first in line
during each tick.

~~~
nodata
Depends how you implement it (a window for placing bids would be one way).

~~~
crdoconnor
This wouldn't help either. HFT operators would race to extract as much
information from the bidders during the window (e.g. by bid stuffing) and
place the bid during the last possible femtosecond before it closes.

------
kubiiii
So high frequency trading somewhat helps reducing the spread which is a good
thing. I can understand that. But if HFT is a fix, instead of taxing HFT why
not making it a task banks would deal with and earn money from it? A
percentage of the revenue enabled by HFT would go to the bank and the rest to
society.

