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"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.

 


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Fri, 08/28/2009 - 12:03 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:13 | Link to Comment 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 | Link to Comment 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 | Link to Comment Anonymous
Fri, 08/28/2009 - 14:08 | Link to Comment 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 | Link to Comment darkness (not verified)
Fri, 08/28/2009 - 12:04 | Link to Comment 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 | Link to Comment . . .
. . .'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 | Link to Comment Anonymous
Fri, 08/28/2009 - 12:19 | Link to Comment Anonymous
Fri, 08/28/2009 - 12:19 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:05 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:02 | Link to Comment 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 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:27 | Link to Comment 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 | Link to Comment Anonymous
Fri, 08/28/2009 - 16:57 | Link to Comment spanish inquisition
spanish inquisition's picture

Thank you

Fri, 08/28/2009 - 14:11 | Link to Comment 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 | Link to Comment darkness (not verified)
Fri, 08/28/2009 - 15:04 | Link to Comment 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 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:55 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:55 | Link to Comment Anonymous
Fri, 08/28/2009 - 16:37 | Link to Comment Anonymous
Fri, 08/28/2009 - 17:12 | Link to Comment Anonymous
Fri, 08/28/2009 - 17:55 | Link to Comment Anonymous
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