This page has been archived and commenting is disabled.

"Tobin Tax" Speculation Creates Flurry Of Criticism, Set To Curb HFT Profits?

Tyler Durden's picture




 

A new page in the fight between HFTs and everyone else was turned recently, after Adair Turner, Chairman of Britain's Financial Services Authority, said that he would consider the implementation of a "Tobin tax" on banking transactions. As a reminder, James Tobin introduced the idea of the Tobin tax in 1971, as a tax on cross-border currency trade, which at its core was meant to moderate short-term speculation in currency trading. Its latest incarnation, however, would strike at the heart of the speculative bubble that has gripped global markets.

And here is where the HFT angle comes into play. According to Avinash Persaud:

Financial institutions naturally concentrate on the most
lucrative activities, and those are ones that involve extensive
trading; consequently, the financial system is biased toward
heavy trading and churning and has less interest in developing
products that are fit for a long-term purpose but aren’t traded
so often.

That’s why great attention is devoted to hedge funds
involved in high-frequency trading and less to buy-and-hold
pension funds.

With the daytrading bonanza that the stock market has become, while all regulators continuing to turn a blind eye to the ridiculous churning in such penny stocks as Citi, FNM, FRE and AIG, Persaud likely has a point.

And already the litany of protests against this form of short-term speculation curbing has proven to be fierce. To quote the BBA:

"If we introduce the wrong kind of regulation or the wrong kind of
taxes we could so easily lose that position by driving business abroad
. . . On so many occasions in the past the country has lost chunks of
industry through making the wrong decisions. Let's not do that again."

And the criticism has spread across the Atlantic as well:

US bankers were equally hostile to the idea of a global transaction
tax. "We vigorously oppose a tax on the industry," said Scott Talbott,
head of government affairs at the Financial Services Roundtable, which
represents the top 97 US institutions. "The financial services industry
is a leading sector around the world in producing jobs and providing
people with goods and services they demand. A punitive tax would
unnecessarily restrict the industry, harm shareholders, and ultimately
weaken a key segment in the world economy."

 

One big bank chief
economist described the suggestion internally as "a stupid idea", while
a senior executive at one European bank said: "Global taxes don't
happen. Unless next month's G20 meeting can suddenly pull something out
of the hat, this will be largely ignored."

Such a pervasive outpouring of anger likely indicates that a Tobin tax introduction would likely impair many parties' revenue-stream interests.

Plus how would firms like GETCO continue earning $400-$800 million a year on providing 10% of the intraday "liquidity" in the market during volatile days (one wonders if between GETCO and the other top 10 HFT entities out there, whether anyone else was trading at all in the violent days of last fall, and actually continuing all the way to today).

Then again, if this idea does get traction in the UK, a cash starved US administration may promptly follow suit as it vigorously scratches its head on how to generate some revenue for its ballooning budget deficit. And while Wall Stree firms are now armed with substantial NOL carryforwards courtesy of the billions in 2008 writedowns, thus likely not having to pay State or Federal tax for years, this could be one avenue in which Obama can reap some of the benefits of the 50% market run-up driven exclusively by speculation and potentially abusive trading practices which control 70% of the market volume/churn.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 08/28/2009 - 12:03 | 51790 Anonymous
Anonymous's picture

"one wonders if between GETCO and the other top 10 HFT entities out there, whether anyone else was trading at all in the violent days of last fall, and actually continuing all the way to today" _____ Agreed. HFT has been leading to ridiculous moves in the market. Down 50%. Up 50%. nobody else is trading. 70% of all trades are these people. In 2008 if they kept shorting fiercely, then obviously all the long term holders would get stopped out of their positions leading to even more selling.. And now the opposite is happening to the upside. Get rid of this shit. Adds no value

Fri, 08/28/2009 - 13:13 | 51867 peterpeter
peterpeter's picture

So you suggest that HFT are trading only with themselves, and yet they are making a profit while closing their books at the end of each day.

Please explain how that works with 1 single round trip example transaction showing bid/ask/trade and commission/rebate.

 

 

 

Fri, 08/28/2009 - 13:38 | 51918 rD2.0
rD2.0's picture

HFT1 sells (short) 1000 shares of AIG to HFT2 at $50

HFT2 sells those 1000 shares again to HFT1 at $49

HFT1 sells those 1000 shares to HFT2 at $48

HFT2 sells those 1000 shares to HFT1 at $47

HFT1 sells those 1000 shares to HFT2 at $46

HFT2 sells those 1000 shares to HFT1 at $45

HFT1 sells those 1000 shares to HFT2 at $44

HFT2 sells those 1000 shares to HFT1 at $43

HFT1 sells those 1000 shares to HFT2 at $42

HFT2 sells those 1000 shares to HFT1 at $41

A long term holder gets nervous seeing all that down volume and dumps his 1000 shares at $41. So now there is REAL DOWNSIDE to AIG as real investors are being forced to sell their stock

HFT1 buys 500 shares back at $40

HFT2 buys 500 shares back at $40

So at the end of the day HFT1 and HFT2 have traded 1000 shares again and again between each other and so have zero profit/loss ... but they have overwhelmed the market with enormous volume forcing real investors to sell their stock which HFT1 and HFT2 buy back at lower prices to profit on their own shorts

Obviously 1000 shares is too small a number.

But if they control 70% of all trades, they can do some serious damage this way

Fri, 08/28/2009 - 13:58 | 51950 Anonymous
Anonymous's picture

You have to remember that for every seller there's a buyer. When HFT1 sells to HFT2, HFT2 is buying from HFT1.

Without changing a thing I could restate your example as:
HFT2 buys 1000 shares of AIG from HFT1 at $50
HFT1 buys those 1000 shares of AIG from HFT2 at $49
HFT2 buys those 1000 shares of AIG from HFT1 at $48
HFT1 buys those 1000 shares of AIG from HFT2 at $47

So why would the price go down?

Fri, 08/28/2009 - 14:08 | 51968 peterpeter
peterpeter's picture

OK, now try again calculating the PnL for HFT1 and HFT2 with each transaction, noting that since they buy and sell to each other, only 1 can get a rebate from the ECN (figure 0.0025 per share rebate), and the other party is paying (0.003 per share).

Then add in the other fees:

SEC: $25.70 for each $1M sold

NASD: 0.000075/share

NSCC: 0.00003/share

ACT fee: 0.029/order

And next time, try to make HFT2 not suck so much.... they lost over $1K (once you factor in the comissions and fees) on each round trip!

Fri, 08/28/2009 - 15:06 | 51983 darkness (not verified)
darkness's picture

HFT has been leading to ridiculous moves in the market. Down 50%. Up 50%. nobody else is trading.

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Fri, 08/28/2009 - 12:04 | 51791 rD2.0
rD2.0's picture

"one wonders if between GETCO and the other top 10 HFT entities out there, whether anyone else was trading at all in the violent days of last fall, and actually continuing all the way to today" _____ Agreed. HFT has been leading to ridiculous moves in the market. Down 50%. Up 50%. nobody else is trading. 70% of all trades are these people. In 2008 if they kept shorting fiercely, then obviously all the long term holders would get stopped out of their positions leading to even more selling.. And now the opposite is happening to the upside. Get rid of this shit. Adds no value

Fri, 08/28/2009 - 12:08 | 51795 . . .
. . .'s picture

Given that the spam email industry has managed to fight proposals to kill them with a tax on email, what are the odds the public can manage to impose a tax on securities trades that would kill the HFT industry?

The Tobin tax seems like a gift to politicians.  Sounds good enough that someone will bring it up every year, so the HFT players will have to give a steady stream of campaign contributions to keep it from going any where.

Fri, 08/28/2009 - 12:11 | 51800 Anonymous
Anonymous's picture

G8 countries have a looming tax crisis on their hands; the current taxation structure is wildly out of date and inadequate. A Tobin tax is logical, which of course scares the living crapamundo out of them cause it means some really tricky communicating to explain why they don't want it in certain sectors. As someone who works in a financial media, I can testify that most traders expect a speculation tax of some sort to curb the recent lunacy. I don't think we should disappoint them.

In the end, governments know that if commodities speculation runs wild again, the so-called 'recovery' is over.

Fri, 08/28/2009 - 12:19 | 51806 Anonymous
Anonymous's picture

More noise coming from the regulators. Nothing has been implemented since the economic crisis began. Nobody has taken responsibility.

Fri, 08/28/2009 - 12:19 | 51807 Miles Kendig
Miles Kendig's picture

One more card in the deck.  France & Germany are looking to curb bonuses and hedge funds, The four Tigers want stable trade funding, the commodities producers are looking for price stability and everyone wants the dollar to stabilize.. except us.  I am sure that there will be some wheeling and dealing.  Let's see what happens. 

Fri, 08/28/2009 - 12:26 | 51809 OMFGjustINDEX
OMFGjustINDEX's picture

Once China finishes buying up all the raw resources available...stuff like this becomes utter semantics. Even a world war wouldn't get us out of the hole we are in since we wouldn't have any steel or coal to get the factories turning. Unless we plan on heading over to China and taking it by force...and THEN shipping it back to the US. I don't think China would be very pleased about that proposition.

Another one bites the dust...

  • Baosteel to buy 15% stake in iron ore and coal co., Aquila Resources Ltd., for $240M.
Fri, 08/28/2009 - 12:27 | 51810 crzyhun
crzyhun's picture

As much as HFT is a menace, this tax is a bigger menace! A blighter!

Taxes are insidious and applied poorly. Higher taxes lower over all productivity and innovation.

Fri, 08/28/2009 - 12:33 | 51812 Obnoxio
Obnoxio's picture

I'm in favor of a Tobin Tax. I also plan to use the "Established Men Sugar Daddy Dating" site advertised on your site after I win the Mega-Millions tonight:)

Fri, 08/28/2009 - 12:36 | 51814 Cognitive Dissonance
Cognitive Dissonance's picture

I object to any tax because it legitimizes the activity. It's a bulls**t end run to allow the thieving to continue and even expand.

If the playing field isn't even, remove the players and either regrade the field or remove the unfair advantage another way. Taxing it does neither.

Fri, 08/28/2009 - 12:41 | 51820 digalert
digalert's picture

Not mentioned here is everyones fave GS. What the hell is a government backed TARP BANK doing trading equities? All upside, zero risk.

Fri, 08/28/2009 - 12:46 | 51832 Anonymous
Anonymous's picture

There is already a tax called capital gains. At least it's a tax they can collect. By the way, I'm an independent daytrader, I can flash order route also without paying ecn charges...to me that's a good thing.

Fri, 08/28/2009 - 13:05 | 51853 Anonymous
Anonymous's picture

how bout a tax on morons who propose moronic laws

Fri, 08/28/2009 - 15:02 | 52057 They steal from...
They steal from us everyday's picture

You mean a 'liberal' tax.

 

Yeah, I am in favor of that.

Fri, 08/28/2009 - 13:25 | 51886 Anonymous
Anonymous's picture

There is a singular qualified tax that will create remedy for the US....

There should be only a 10% Consumption tax whose revenues are utilized by the state....and an additional 5% Consumption tax to be utilized by the Fed....

No other taxes....

No IRS....
Taxes are spent by state mandate....not Fed lobbyists....

Then the US will immediately experience rapid bank repair....and shortly thereafter full employment....

The icing on the cake will be a non-gamable non-fragmented public direct access market whereby all securities will transact with no taxes....

Companies will focus on a US domicile.....

The word taxhaven will vanish....from what ?

..........................

Any move towards any sort of tax increases without changing the tax structure to such a consumption tax....

IS FATALLY FLAWED.....

Otherwise expect a cross between Japan and Argentina to be the US norm....
Whereby the gap will only widen between the haves and the have nots....

Most importantly a 10/5 C tax will create proper
revenues....and create individual freedoms....

Fri, 08/28/2009 - 13:27 | 51893 spanish inquisition
spanish inquisition's picture

I have a question, HFT pays a liquidity provider money to trade stock. Now you have JPM and GS trading a stock back and forth +$.01/-$.01, all day long to the tune of $100m/month(?). If liquidity providers have a combined market share of over 50%, then the exchange should of went broke long ago. How are they making money? Is the Fed paying the exchanges or am I mistaken on how the system works?

Fri, 08/28/2009 - 14:10 | 51974 Anonymous
Anonymous's picture

They pay you to add liquidity say 0.0025 per share (ie $2.50 per thousand shares) and they charge you to remove liquidity 0.0030 per share. They make money on the difference.

Every transaction consists of one party adding liquidity and another party removing it.

Fri, 08/28/2009 - 16:57 | 52234 spanish inquisition
spanish inquisition's picture

Thank you

Fri, 08/28/2009 - 14:11 | 51982 robert_paulson
robert_paulson's picture

Actually, a small tax ($0.01-0.02) doesn't sound like a bad idea to me.  I'm not a fan of taxes (who is), but the actual effect on retail investors or medium/long term institutional traders would be close to nil.  Intraday traders would take a little hit but could survive.  The only parties who would be hurt would be those doing the churning... Plus God knows the gov't needs the money.

Fri, 08/28/2009 - 15:05 | 51986 darkness (not verified)
darkness's picture

It isn't such a bad idea either.

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

 

Fri, 08/28/2009 - 15:04 | 52060 They steal from...
They steal from us everyday's picture

There is no reason to tax individual investors.

 

Tax on volume.

Fri, 08/28/2009 - 15:06 | 52061 Anonymous
Anonymous's picture

I have news for you. The UK already has a version of the Tobin Tax applied to equity trades. However, only mom and pop investors pay it. The "professional" traders are exempt as will be the case for the big Wall Street institutions in the US if this dreadful tax was ever imposed.

A tobin tax in the US would move liquidity overseas OVERNIGHT.

I trade 1.5 million shares per month on average. A simple .02 cent per share transaction tax amounts to $30,000 in additions overhead per month!

I am beginning to wonder how many actual traders are on this site from the number of posts in favor of this sort of tyranny tax.

Fri, 08/28/2009 - 15:55 | 52131 Anonymous
Anonymous's picture

We have fought for many years to make the bid/ask spread contract by simply being able to enter our own bid between the market makers....

Such a rule will widen the bid ask spread such that one will have to pay a spread of 5 to 12% just to buy or sell a stock....

It will be like trying to buy/sell real estate....

The cost of transacting securities by the bid/ask alone will mean that a stock will have to go up over 20% to break even....

If this is what the lawmakers want....this is what they will get....along with a trashed stock exchange....that is already facing big headwinds....

Fri, 08/28/2009 - 15:55 | 52132 Anonymous
Anonymous's picture

We have fought for many years to make the bid/ask spread contract by simply being able to enter our own bid between the market makers....

Such a rule will widen the bid ask spread such that one will have to pay a spread of 5 to 12% just to buy or sell a stock....

It will be like trying to buy/sell real estate....

The cost of transacting securities by the bid/ask alone will mean that a stock will have to go up over 20% to break even....

If this is what the lawmakers want....this is what they will get....along with a trashed stock exchange....that is already facing big headwinds....

Fri, 08/28/2009 - 16:37 | 52197 Anonymous
Anonymous's picture

1000% correct....

The cost of transacting is and has always been mostly the spread between the bid ask which electronic trading via ecns has closed....

To keep retail traders from having to pay 20 % just to break even....which is exactly what the Tobin tax would do...the govt. should just tax via st cap gains....

ST cap gains tax would allow retail to buy/sell with a non existent bid ask spread ....rather than having to make 20% just to break even....

But the real threat is that the exchange can just move elsewhere....

One must remember that an electronic exchange are just computer banks....and can easily be located in any country....

A Tobin tax would just damage US retail....and more companies would domoicile out of the US....which means earnings will be domiciled non US....

It is quite clear that a Tobin tax actually is a 20% transaction tax on retail buyers/sellers....

ST gains would be a proper tax vs Tobin....

However what the US really needs is govt, downsizing, and for innovation capital to be tax free for any transaction...

A 10/5 Consumption tax would cure the US economic ills....a;ong with granting individual economic advancement and liberties that no other country offers.....

Furthermore companies from all over the world would domicile in the US and bring lots of jobs....

A 10/5 C tax is a sustaining solution....

Fri, 08/28/2009 - 17:12 | 52252 Anonymous
Anonymous's picture

It is very unfortunate that the current set of politicos....are not the sharpest tools in the toolshed....

A Tobin Tax is indeed a 15 to 25% tax on retail....which would have exactly opposite the effect that it hopes to instate....which is exactly why is is imperative that qualified people should serve in resposible positions....

One wants to be a doctor and not go to medical school ?

This is same as a person who has no experience in trading ....being a politician and trying to placate people who are mad at the world and want the politician to jump when they say jump....

A Tobin tax would be the same as saying goodbye to another American industry.....

One can logon to any computer anywhere anytime....

Definitely.....a different set of politicos is warranted....

Fri, 08/28/2009 - 17:55 | 52299 Anonymous
Anonymous's picture

Yeah man....the future's bright....

I can't wait to buy one of those govt. motors cars....GMC....
whereby the batteries last for 30 miles for $40,000....

And stocks....man I can't wait to buy stocks and break even after they rise 30% because of the Tobin tax....

I can't wait to get my medical rations when I get older....

And I really can't wait to pay 70% "real" tax that is called "no tax increases"....

The politicos lawyers will sure make it legal to call increases whatever they want....

Yeah...and pay another $2 per gallon for the planet warming problem....you know where the average temperature might increase 1/2 degree in 129 years....

Yeah....It will be good to be in the New America....

And it's good to know that my childrens' great grandchildren will still be paying for the "Bank Follies"....

Cattle are cattle....

Sheep are sheep....

Do NOT follow this link or you will be banned from the site!