7 ms·

The gargantuan stupidity of the financial transactions tax

26 points by ghosh 13y ago

Houshalter 13y ago
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.
- thaumasiotes 13y ago
  People trade after hours.
- riffraff 13y ago
  I think the problem this solution tries to fix is that a lot of money have moved to "pure financial investment" from "tangible stuff", e.g. think of Warren Buffet's Gotrocks parable. I don't know if the problem is real, and I don't know if this tax would fix it, but that is in my understanding why taxes on financial transactions are thought as useful.
  - Houshalter 13y ago
    As far as I can tell this is aimed at HFT specifically, and wouldn't have an effect on the rest of the financial industry.
- another-one-off 13y ago
  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 13y ago
    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.
- SideburnsOfDoom 13y ago
  > The real "problem" as I understand it is that some people get information sooner than others and can profit from it That's backwards. Exactly synchronising the dissemination of information is a hard problem. HFT leverages even small sub-second differences. Even simple physical factors (i.e. the speed of light) mean that being closer to the exchange is highly desirable as this will mean getting the information sooner. People did not create the phsyics of that problem.
  - Houshalter 13y ago
    I'm aware of that. That's why I suggested doing trades in discrete time blocks. All trades within the time block will be executed at the end in a nondeterministic order, regardless of who was first. It's not perfect because someone could still get information at the end of the time block before anyone else does. I can't think of a solution to that. Perhaps instead of time blocks, execute trades randomly within a short period of them being posted. Completely disrupting millisecond advantages with random noise.
- venomsnake 13y ago
  You can have very different opinion about friction depending on where it is. You won't use the same lube that you use on your crankshaft on your brakes. At least I hope so - the last time I saw "My brakes are screeching I greased them" was hilarious, but that is what bumpers are for. So we want lower barriers to entry in trading and moving capital to the productive sectors of the economy and smarter trades. That is why the transaction tax could be helpful - we want to move the largest amount of capital to the economy and not the maximum possible numbers of transactions.
  - Houshalter 13y ago
    Your analogy and the argument after it make no sense to me. Barriers to entry won't be lowered by this, nor will trades be smarter.
- yxhuvud 13y ago
  A solution that would probably be better and less easy to abuse would be to move the minimum price from a penny to like 1/100000 of a penny. It would reward those with better algorithms and it would not favor speed as much.
- crdoconnor 13y ago
  >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 That's effectively describing the problem is a slightly reformulated way. HFT basically gives traders priority access to the market - they can receive outside information at the same time as you and just react to it quicker. Moreover, they have priority access to information about how others in the market are behaving. >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. That simply changes the race from about being the quickest trader to being first in the queue during the increments.
  - Houshalter 13y ago
    >That simply changes the race from about being the quickest trader to being first in the queue during the increments. True, it would have to be in a nondeterministic order. I posted another possible solution above, randomly fuzz the time trades are executed to within a few seconds after they are received. Completely disrupting any millisecond advantages. I just realized the problem with that is someone could just send millions of trades through and increase the probability one of them is executed first. So maybe not.
bsaul 13y ago
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 13y ago
  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 13y ago
    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 13y ago
      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 13y ago
        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).
    - rayiner 13y ago
      YC funded a startup that was about selling your old Apple gear quicker than you could on EBay. That's an example of why you'd want more liquidity.
  - 13y ago
nodata 13y ago
Why don't they set the minimum trading interval to something larger to unencourage HFT?
- anonymoushn 13y ago
  That doesn't really help. Many symbols already have an artificially wide spread of 1 cent (they could have lower spreads if they were allowed to). Forcing spreads wider would reduce volume and increase per-trade profit for market makers (read: HFT). I'm not sure which factor would dominate, but it would be unlikely to have a big impact on the market makers' bottom lines. On the other hand, retail investors would enjoy the privilege of paying wider spreads,
- crdoconnor 13y ago
  That doesn't really help if the HFT firms can simply pay to be first in line during each tick.
  - nodata 13y ago
    Depends how you implement it (a window for placing bids would be one way).
    - crdoconnor 13y ago
      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 13y ago
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.
gd1 13y ago
"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 13y ago
  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 13y ago
    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).
- crdoconnor 13y ago
  It's kind of irrelevant anyway, since any financial transactions tax would be at least a couple of orders of magnitude less than 3 bps. i.e. - "harmful" for HFT, but practically irrelevant for anybody who doesn't do extremely frequent trades.
bakhy 13y ago
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.
crdoconnor 13y ago
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-reformers-sabotage-themselves-with-terrible-branding.html http://www.nakedcapitalism.com/2013/11/robin-hood-tax-how-re... >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).
rayiner 13y ago
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.
- mmaldacker 13y ago
  Indeed, most arguments against HFT say it's a parasite business. However, I haven't seen anyone give precise numbers on how much money they're "stealing" compared to how much money non-HFT hedge funds and investment banks make. I suppose this is the internet where everyone is an expert.
- crdoconnor 13y ago
  >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 13y ago
    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.
- tptacek 13y ago
  People on HN tend not to understand that the beneficiaries of the pre-HFT trading regime were, basically, rent-seekers that profited (often collusively) by increasing the costs of trading.
friendzis 13y ago
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.
ig1 13y ago
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.
millstone 13y ago
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.
gaius 13y ago
The interesting thing I find about HFT discussions on HN is the mindset "it's computers, therefore I fully understand it".

26 points by ghosh 13y ago

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.

thaumasiotes 13y ago
People trade after hours.
riffraff 13y ago
I think the problem this solution tries to fix is that a lot of money have moved to "pure financial investment" from "tangible stuff", e.g. think of Warren Buffet's Gotrocks parable. I don't know if the problem is real, and I don't know if this tax would fix it, but that is in my understanding why taxes on financial transactions are thought as useful.
- Houshalter 13y ago
  As far as I can tell this is aimed at HFT specifically, and wouldn't have an effect on the rest of the financial industry.
another-one-off 13y ago
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 13y ago
  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.
SideburnsOfDoom 13y ago
> The real "problem" as I understand it is that some people get information sooner than others and can profit from it That's backwards. Exactly synchronising the dissemination of information is a hard problem. HFT leverages even small sub-second differences. Even simple physical factors (i.e. the speed of light) mean that being closer to the exchange is highly desirable as this will mean getting the information sooner. People did not create the phsyics of that problem.
- Houshalter 13y ago
  I'm aware of that. That's why I suggested doing trades in discrete time blocks. All trades within the time block will be executed at the end in a nondeterministic order, regardless of who was first. It's not perfect because someone could still get information at the end of the time block before anyone else does. I can't think of a solution to that. Perhaps instead of time blocks, execute trades randomly within a short period of them being posted. Completely disrupting millisecond advantages with random noise.
venomsnake 13y ago
You can have very different opinion about friction depending on where it is. You won't use the same lube that you use on your crankshaft on your brakes. At least I hope so - the last time I saw "My brakes are screeching I greased them" was hilarious, but that is what bumpers are for. So we want lower barriers to entry in trading and moving capital to the productive sectors of the economy and smarter trades. That is why the transaction tax could be helpful - we want to move the largest amount of capital to the economy and not the maximum possible numbers of transactions.
- Houshalter 13y ago
  Your analogy and the argument after it make no sense to me. Barriers to entry won't be lowered by this, nor will trades be smarter.
yxhuvud 13y ago
A solution that would probably be better and less easy to abuse would be to move the minimum price from a penny to like 1/100000 of a penny. It would reward those with better algorithms and it would not favor speed as much.
crdoconnor 13y ago
>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 That's effectively describing the problem is a slightly reformulated way. HFT basically gives traders priority access to the market - they can receive outside information at the same time as you and just react to it quicker. Moreover, they have priority access to information about how others in the market are behaving. >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. That simply changes the race from about being the quickest trader to being first in the queue during the increments.
- Houshalter 13y ago
  >That simply changes the race from about being the quickest trader to being first in the queue during the increments. True, it would have to be in a nondeterministic order. I posted another possible solution above, randomly fuzz the time trades are executed to within a few seconds after they are received. Completely disrupting any millisecond advantages. I just realized the problem with that is someone could just send millions of trades through and increase the probability one of them is executed first. So maybe not.

bsaul 13y ago

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 13y ago
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 13y ago
  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 13y ago
    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 13y ago
      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).
  - rayiner 13y ago
    YC funded a startup that was about selling your old Apple gear quicker than you could on EBay. That's an example of why you'd want more liquidity.
- 13y ago

nodata 13y ago

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

anonymoushn 13y ago
That doesn't really help. Many symbols already have an artificially wide spread of 1 cent (they could have lower spreads if they were allowed to). Forcing spreads wider would reduce volume and increase per-trade profit for market makers (read: HFT). I'm not sure which factor would dominate, but it would be unlikely to have a big impact on the market makers' bottom lines. On the other hand, retail investors would enjoy the privilege of paying wider spreads,
crdoconnor 13y ago
That doesn't really help if the HFT firms can simply pay to be first in line during each tick.
- nodata 13y ago
  Depends how you implement it (a window for placing bids would be one way).
  - crdoconnor 13y ago
    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 13y ago

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.

gd1 13y ago

"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 13y ago
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 13y ago
  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).
crdoconnor 13y ago
It's kind of irrelevant anyway, since any financial transactions tax would be at least a couple of orders of magnitude less than 3 bps. i.e. - "harmful" for HFT, but practically irrelevant for anybody who doesn't do extremely frequent trades.

bakhy 13y ago

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.

crdoconnor 13y ago

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-reformers-sabotage-themselves-with-terrible-branding.html http://www.nakedcapitalism.com/2013/11/robin-hood-tax-how-re... >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).

rayiner 13y ago

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.

mmaldacker 13y ago
Indeed, most arguments against HFT say it's a parasite business. However, I haven't seen anyone give precise numbers on how much money they're "stealing" compared to how much money non-HFT hedge funds and investment banks make. I suppose this is the internet where everyone is an expert.
crdoconnor 13y ago
>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 13y ago
  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.
tptacek 13y ago
People on HN tend not to understand that the beneficiaries of the pre-HFT trading regime were, basically, rent-seekers that profited (often collusively) by increasing the costs of trading.

friendzis 13y ago

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.

ig1 13y ago

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.

millstone 13y ago

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.

gaius 13y ago

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