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