"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Wednesday, August 24, 2011

Financial Markets Transaction Tax Meant To Curb HFT Will Only Hurt The Little Guy

As was mentioned in a previous post that involved a statement from Emanuel Durman, there has been discussion in favor of a Transaction Tax which is being hailed as the way to slow down markets by being the conduit to get "sand in the wheels" of market participants.  We're always trying to game systems.  It seems impossible for some people to accept that these dynamic swings are being enabled by various factors (computers, ZIRP, a global discount window courtesy of the Fed, and shame SEC investigations).  We have one group that seeks to accurately pin the flash crash on algo's and another group that thinks computer trading is only amplifying great market movements that are done by humans and we should worry about HFT because, gosh darn it, we're just so lucky to have tighter bid spreads.  The problem here is that the transaction tax doesn't cover all problem areas and we need to stay focused on this topic.  We'll still have traders stuffing exchanges through the practice of Quote Stuffing and we'll still have false Real-Time data after they do, so the tax won't do much to address this issue, it'll only move more money to the gov't so that they can buy off people (like the SEC) and cover up illegal behavior.  What needs to be done is a comprehensive analysis of quote stuffing, exchange pricing lag, and the speed in which it is done.  HFT always promote their "ability to increase liquidity" in markets, though any of us with half a brain can tell that is simply not the case.
From RobinHoodTax: 
 An explosion of high speed, high frequency trading carried out by computers is causing an increasing number of ‘flash crashes’ and undermining markets’ role in efficiently allocating resources, according to a report published today.
Financial Crisis 2: The Rise of the Machines warns that a “technological arms race” has left regulators floundering, unable to step in to prevent problems because of the speed at which transactions are occurring. Unheard of six years ago, experts estimate that high frequency trading conducted by computers according to complex algorithms may now account for more than three-quarters (77 per cent) of all equity deals in the UK.

The report, by the Robin Hood Tax campaign, says Western governments should follow the lead of Hong Kong and impose a Financial Transaction Tax to limit high frequency trading.

Richard Gower, Robin Hood Tax campaign spokesman, said: “This is casino capitalism cyborg-style. In pursuit of a quick buck, humans are ceding control of financial markets to machines and are unable to intervene fast enough if things go wrong.

“A Financial Transaction Tax would ‘throw sand in the wheels’ of markets and could raise billions to tackle poverty in the UK and in poor countries which were hit hard by the financial crisis.”

Andrew Haldane, the Bank of England’s Executive Director for Financial Stability has said that “Grit in the wheels like grit on the roads could help forestall the next crash.” Martin Wheatley, chief executive designate of the Financial Conduct Authority (FCA), one of the successor bodies to the Financial Services Authority, also supports a Financial Transaction Tax as a way of curbing high frequency trading.

The UK already has a 0.5 per cent stamp duty on share transactions which raises about £4 billion-a-year. But high frequency traders can avoid this by trading in derivatives known as “contracts-for-difference”. Extending the stamp duty to “contracts for difference” would be likely to raise upwards of £3bn.

An IMF working paper published earlier this year suggested extending the stamp duty to cover contracts-for-difference. Charles Li, Chief Exectutive of Hong Kong’s stock exchange says its FTT, “effectively limits high frequency trading, just like a highway with many toll booths discourages speeding.”

The most dramatic flash crash occurred on 6 May 2010, when the Dow Jones fell by 9 per cent, with more than half of the fall occurring in just seven minutes. Shares in Accenture plunged from $40 per share to just $0.01. The Dow Jones fall was more than twice that on the day that Lehman Brothers collapsed.

The search for a quick profit has seen high frequency trading spread to bond, currency and commodity markets. On 3 February 2010 traders Infinitum switched on a new oil markets HFT algorithm for just five seconds. In that time they lost more than $1 million and rocked the global oil price which spiked before losing 5 per cent of its value.”

Gower said: “High frequency trading has the potential to cause havoc in markets for commodities which are central to our economies and the lives and well-being of hundreds of millions of people.

“Markets should work in the interests of society – not the other way around. A Robin Hood Tax would be a big step towards a world in which finance behaves responsibly and pays its fair share.”