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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 t

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 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.

gaika 14y ago
It is exactly what happened in France when they introduced a similar tax. All traders moved into CFD (contract for difference) instead of trading the underlying stock.
svachalek 14y ago
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 14y ago
  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.

gaika 14y ago

It is exactly what happened in France when they introduced a similar tax. All traders moved into CFD (contract for difference) instead of trading the underlying stock.

svachalek 14y ago

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 14y ago
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.