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The Transaction Tax Is Harmful
Submitted by Zero Hedge on 12/07/2009 00:03 -0400
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Sorry Stevm30, but I think that you missed what I was going for.
1. The points you make all hinge upon buying and selling of stocks being a good thing for society. My point here is that society doesn't benefit from having companies that have high or low "value", society only gets benefit when there is a beneficial service rendered or a good produce. Unfortunately juggling money from one bank account to another does neither of those things. In fact, this system is detrimental to society. Uncle Bob gets his job cut washing widgets on line 3 so that the share holder (you) can have a "beat", thus the whiz-bang produced now has a 30% shorter lifespan. Your ability to stack that five dollar bill on top of the thousands of others that you have doesn't benefit society, while Uncle Bob losing his job and whiz-bangs that break hurt society. (And no, I am not a socialist)
2. & 3. These are both arguments from the same vein. I completely agree with you that government needs to butt out and let us live our life. Unfortunately we the people got lazy, and let our government be run by a bunch of corrupt and crony shysters that promptly sold us into slavery. Now we have to pay for the mess that we allowed to happen. This means new taxes, and higher taxes, and no more bailouts. I can't see a better way to go about it than to tax that which can only be called a luxury.
Defender, your arguments don't convince. Certainly society benefits when the market is accurately pricing shares of its companies. Here is an examples of why:
Let's say I do my homework (check my facts etc...) on my investments, and another person doesn't. We both invest in year 1... after several years, assuming that the pricing system works properly, I will have gained more than the other person... with my profits, I can buy a larger house, have more children, buy a new car. The other person, who gained less, or loss money, can't. The "values" of the marketplace have rewarded virtue, and a respect for truth, and those values will be seen and adopted by others.
The error in your point of view stems from a prejudice toward the visible (Bob), and tangible, and a prejudice against the indirect, but just as real, positive consequences of orderly pricing of assets.
Also, I chuckled when I read that the new "whiz-bangs" now have a 30% shorter lifespan - what made Bob so great at washing them??? - if that's so, why do you still buy them? If you don't care, what difference does it make anyway? Also, why should Uncle Bob get preferential treatment (as compared to someone in China)... you might not be a socialist but that sounds pretty nepotistic to me.
Finally, if the people got lazy, the solution is not to do the next lazy thing, which is to pass a law, and create a tax... it's to find the root of the problem and fix it.
Thank you for responding Stevm30, I see that we have been arguing the opposite ends of entirely different sticks.
My point is that the stock market itself is a drain on society. What started as a useful function of moving cash to people that needed to produce things has since denigrated to little more than a slot machine that people go to everyday to pull the lever just one more time. Each one of them hoping to get 3 lemons so that their CDS will pay out. What does daily gain have to do with investing? How has your purchase of 500 shares of CIT furthered this society? My hope is that a sizable transaction tax will revert the market to what it is supposed to be, and maybe remove the grift that has seeped into it.
As far as Bob goes, my example was supposed to mean that they no longer washed the parts at all, and thus the bad lifespan on the whiz-bangs. Why would I still buy the whiz-bangs? Well, maybe a whiz-bang is a car engine, and when i have to buy my car second hand, I find out that I have to replace the engine at 110K miles. But since this is the only car I can afford, what choice do I have. And while we are on the topic, the reason that I have a decided disdain for the intangible is that I have never had my life improved by one. The privilege of paying $20 for a $0.05 DVD, $50 for getting the engine codes read on my car, and $100 for that pill has left me a little jaded. Why should I pay those exorbitant prices? Well, that fat cat company has to meet its target earnings, so that your pants can jingle when you walk.
For your final point, I would like to remind you that we are already in the middle of the problem, and it is never lazy for a working man to say that he doesn't pay enough taxes. It is my life and my blood that I pay taxes with. What I am saying is that this nation requires a massive helping of austerity, just to get our head back to the surface. With the leaden weight of $12 trillion dollars around our ankles, we will be lucky to get out alive.
the government sold us into slavery........nonsense hyperbole...........you really don't know anything about government or slavery or taxes or anything, do you?
I pay almost 1/4 of my paycheck in payroll taxes and insurance, and I don't make all that much. Then there is sales tax, and a tax to drive my car, and other ones that I am not thinking of right now. I am sure that these will all increase soon, as the carrying cost for the national debt is about $1300 per man, woman, and child. How much of my life must be taken from me before I am considered a slave?
`If they realize that the market is overvaluing one firm, due to their analysis, they buy it, and bring the price to a more rational level. '
Borrowing free money to inflate the market ? What's the rational p/e of the markets today ?
I could make millions gambling in Vegas too. All I need is limitless free money and a backstop from the Treasury and FED.
OK, and I agree with you 100% about the FED. It should be abolished. But that is a separate issue. In this thread we're debating the tax.
Well said Defender...Might I add, corporations do not profit from trading in their stocks once they are initially sold.
I'm tired of taxes being used to some folks behaving the way other folks think they should. If the activity is bad or harmful, just make it a no-no. If it isn't illegal, then stop trying to tax the behavior you want.
HFT bad? Then HFT is banned and not allowed in our markets, not just made expensive. Taxing it to stop it is underhanded and, uh, greasy. That's *their* game, not mine.
More behavioral engineering through taxation, terrific. If the constitution weren't a dead letter, there would be zero need for this debate.
Any level of taxation, even no taxation, is a choice to engage in behavioral engineering. It's just a question of who the intended beneficiary is. Color me surprised to see so much support for the non-productive predator class among the Randites here.
I couldn't be more concise and precise.
+10
The is absolutely no reasonable justification for a tax. I also think they should remove the tolls from the bridges and tunnels entering and leaving Manhattan. How is that fair?
The securities transfer tax has to be directed at the most parisitcal elements of finance capital. The 1% tax (in the case of the USA) needs to be split evenly .5 for the feds and .5 for the 50 states, apportioned by representation. NO money is to go to any international bank of the world or anything like it.
The primary goal is to extinguish derivatives, and fund the social safety net. The nationalization of the fed by itself kills the personal income tax so this has nothing to do with that. The personal income tax only goes to pay interest to offshore foreign banks, and has no purpose within the republic.
It is very important to destroy programmed trading, high frequency and flash trading and whatever other names it hides under. If you want market liquididty, stop extracting wealth from the nation to cover the deflating negative value rasbucknik derivatives. Giving the WHOPPER at 85 Broad St the power to manip-ulate the market does not help anyone, anywhere except 85 Broad St.
Surely you jest. There are actually people who read (and understand?) ZeroHedge who believe that a tax (remember, a tax is an INVOLUNTARY taking of something by someone else from YOU, by force, upon pain of imprisonment or worse) is a good thing?
Can this really be true??
the people who voted for marla just want in her pants
if you'll vote for something, you don't believe in, just to get a perk, you're no better than a career politician (sorry marla, probably a sweet perk)
Just want to be sure I understand your point. Prior to Marla's admonition to the contrary, it was common sport at ZH to propose assorted ways to have The Squid's head on a pole. Some of it quite graphic. So, it's ok to call for the Wall Street elite to be missing in action, but it's not ok to simply tax them. A plumber is taxed for his parts, his labor, his profit, and his estate -- why not a little bitty transaction tax on Wall Street's activities? Seems like a small price to pay.
Tax, tax, tax, tax, Rocky..............FOR WHAT????? If the government weren't so corrupt/inept at what they [try to] do, we all might be more sanguine about paying taxes. As it is, the situation is so bad the right answer these days is ALWAYS................NO TAXES!!!!!
Oh, I don't know. Call it retribution. Revenge.
What else can one do when faced with an untenable situation.
Go the the mattresses and shoot at anything that moves.
When all seems lost irrationality prevails.
The most egregious perpetrators will escape the tax anyhow.
RIght on. Seriously people, I am complately surprised by the support for this ludicrous tax. It will completely destroy thousands of work at home trader jobs and screw up liquidity. How can there be so much support here?
100% tax on failure to deliver would be good too. If your not naked-shorting stock there should NEVER be a failure to deliver stock on a short position.
A graduated tax on volume now...That has a huge upside to it IMO...
Considering, any transactions on 401k's should be exempt; I can't think of any others deserving exemption. Pension funds expenses are itemizable, are they not? Mutual funds as well;else, why would they churn their accounts constantly? I buy certain shares at predictable times, dollar cost averaging if you will...I don't spend my day buying and selling my stocks. I see your point about trading profits too...Good idea!
A tiny tax, sufficient to wipe out HFT laddering via volume rebates would be hilariously effective.Until GS had an exception passed!
It would not hurt small time types, it should be targeted to nuke the HFT abusers.
And once you've gotten rid of the HFT traders, who do you think will be on the other side of your limit orders???
The HFT machines are the modern day market makers, and markets without market makes do not function (outside of a select few super liquid names where there are natural buyers and sellers in sufficient quantity).
And, if you don't like the ~1 penny per share that you are paying to the computers, then you never traded against human market makers (making their markets in 1/8ths - that is 12.5 cents for the fraction impaired).
Hi Peterpeter,
We exchanged posts a while back. I regret not answering your last post, but I appreciated the reply. You made some valid points. Glad to see you to let you know.
HFT issues are the only thing I have seen you post on (I don't read everything, this is just what I noticed). I can see the issue is important to you. You are close to it and feel like others operate on myths about it.
Do you think there could be a way for the transactions to be more transparent, to somehow post more information about what is happening during a series of trades? I think how closed it all seems is a big part of why I don't trust it.
It's not easy.
I spend 12+ hours per day working on software to make trades and when I want to look at log files for a trade and determine why my software attempted to make a particular trade and follow the transaction to its completion (cancelled, replaced, filled or partially filled), it usually takes me several minutes of working through log files with literally dozens of lines of output over several milliseconds (thousanths of a second).
Each strategy is different in nature, and noone wants to reveal the inner workings of their own strategy.
The folks who seem the most worked up about HFT believe that all HFT is predatory in nature, where some signal is received in advance of all other market participants and that trading is based off of that information. There are certainly instances of that (mutual funds moving large blocks of shares in a naive way do open themselves up to being gamed because of the way they leak information about their future orders) - but mostly, that is not what is happening day in and day out.
Most HFT strategies are seeking to make a profit by either working both sides of a trade (i.e. seeing a market where the best bid is $9.90 and the best ask is $10.10, and placing a bid at say $9.91 and an ask at $10.09) to make a spread, or are calculating what they believe the market will value an asset at in some short time interval in the future (based on anything from momentum to the depth and size of orders on both the bid and ask sides, to fundamentals like exchange rates, interest rates and the movement of other related asset prices).
There really is nothing new under the sun with respect to HFT, other than the speed at which the math and the trade execution can occur.
Most of the HFT programs simply displaced humans who were attempting to profit off of the same strategies and information, however because the computers can do so many more calculations, they are able to cover a wider spectrum of assets than humans ever were (and with much greater precision) - which in turn leads to a great deal of competition. This in turn favors retail.
Example... My software has a position XYX that I paid 100.00 for. I am now looking to sell out of that position. Of course, I am looking to sell it at a price as high as anyone will pay for it, so I check to see what the best ask for XYZ is and see that it is 100.10. I place a limit order to sell XYZ at 100.09, so that my order will get filled ahead of the 100.10 order that was placed before me.
Now... because there is such intense competition, what frequently happens is that as soon as my order is placed at 100.09, it gets sent out as a quote to all market participants, and a few milliseconds later, there is a good chance that the order at 100.10 will get cancelled and replaced with an order to sell at 100.08 (jumping in front of me by a penny). This process continues where all of the various computers trying to sell the same asset will keep jumping in front of the other - until such time as they believe that there is no longer a profit to be made. That means that for the assets most frequently traded by the machines, the profit per trade converges on a value below 1 penny.
And all of this happens very very quickly. The net result of the competition is that instead of me having my limit order posted to sell XYZ at 100.09, it usually gets improved all the way down to 100.01 - or whatever value I stop making money at.
All however that the tinfoil hat wearing blog posters see is a machine that has sent out 5 limit orders and cancelled 4 of them in a time frame shorter than a blink of an eye - and thinks that something truly evil is going on.
Thank you for this explanation. The point about being the modern market makers is key.
Based on peterpeter's description it occurs to me that the whole source of profit in the HFT game comes down to information asymmetry. Right now the HFT specialists are the beneficaries. But, as creative distruction takes hold, the profits will become more evenly distributed and become dissipated. The idea that the current HFT outfits will be the sole posessor's of this knowledge from here on out is nonsense. Case in point, this guy is spending over 12 hours a day improving his mousetrap just to keep up with the relatively small number of participants who are already in the game. Other players will figure out how to work with HFT for their benefit. What is to keep HFT from moving into other markets? Think about those thinly traded futures. With HFT players in the game companies will have another tool to help them hedge a particualr risk.
It seems to me that having many market makers is much better than relying on the anointed few. With enough HFT players dualing over pennies we may well end up with with a market in which we have greater liquidity and confidence in than anything based on the current framework.
> Case in point, this guy is spending over 12 hours a day improving his mousetrap just to keep up with the relatively small number of participants who are already in the game
There are hundreds (possibly thousands) already in this space - which is why the competition is so intense and the resulting spreads are so thin.
New entrants who can improve on existing strategies are constantly entering the market, and existing players are continually improving their strategies or going out of business.
> It seems to me that having many market makers is much better than relying on the anointed few.
There are no "anointed few" in HFT. There may be some companies that are larger than others in this space (GETCO, GS are already clearly on your radar), but there are constantly new entrants eating at their lunch.
I can't think of a single field where there is as much competition, and in which the barriers to entry outside of programming skill are so low. Reports of "super computers" and multi-million dollar expenses to co-locate are nonsense. A $10K Dell computer is sufficient to compete (if programmed well), and co-location space is cheaper than most companies pay in rent monthly.
In contrast - before the machines started making markets, we did rely on a select group of relatively few human market makers (running around in funny looking jackets), who were sued by the SEC in 1996 for collusion (something not possible with many machines competing with each other on a micro-second time scale).
The folks who rail against HFT seem to prefer paying larger spreads to humans that are more capable (not more desirous) to cheat than the machines. Makes no sense to me.
peterpeter, you have brought me onto your page. Thanks for your reply to my obvervations above.
I had no idea the were that many players in the HFT game aleady, perhaps I should have said the "compartively few". Anyway, the whole notion of trying to count how many players there are is a slippery one. Do you count the number of alorithims or the instances of them?
Peterpeter,
Thanks for answering my question and staying with it. I think a lot of people have benefitted from the ensuing discussion. Regarding collusion, I am suspicious that the so called plunge protection team is a bunch of computers commiting incest with each other in order to drive up the markets and make the Dow look good so that we can project stability to the citizens of the US and the rest of the world. Because no one can get a looksie at the "property"/programs of others, how could we ever find out if such a thing was true or not? I am not smart enough to know if this is specifically a HFT issue (though I think it is because if I was right, it is the frequency of the trades that makes it possible to even out the dips) or not. And a hidden program (or 2 or 3 or 8 cooperating hidden programs) is that, hidden.
exactly, the HFT activity can drive the market with massive activity, producing an artificial field. pumping the price of a low priced stock on low volume on no news, in a sector that is commonly understood to be heading towards reduced earnings, is not a value creating activity. lets call a spade a spade. how do we inhibit the blatant manipulation that turns the market into a surreal parody. GS doesn't need to be taxed, but they certainly should be fined.
I think we agree, but that may not be enough.
1. I think they need to be broken up anyway because they are breaking anti-trust laws.
2. If the collusion I (and many others more convincingly than me) am suggesting is real, they need to be more than fined. The need to be treated like racketeers and the RICO act needs to be applied to their situation.
Because the situation is unique, I think there needs to be a hybrid of these two ideas to deal with the too big to fail. Fining them is not good enough. It is not a deterrent. They are Too Big To OBEY. They need to be split up until they are manageable by the regulatory agencies so that this kind of thing cannot happen again.
That is, of course, if the collusion aspect could be proved. If no one can get a look at the program, well now, whats a regulator to do?
wheres elliot ness when you need him
GS seems to be the one who is "untouchable" right now.
"the whole source of profit in the HFT game comes down to information asymmetry."
and as pp says, this is a game as old as the stock market just now played with computers. the question is whether computers are, when taken as a whole, making info more symmetrical or worse than it was before they arrived. some could make a strong case that the existence of ZH alone suggests that it has. and the vig per trade has reduced so much that the big boys have to spend more and more capital to capture volume.
"Case in point, this guy is spending over 12 hours a day improving his mousetrap just to keep up with the relatively small number of participants who are already in the game."
excellent point, how about an open-source HFT algorithm then? have all the peterpeters & sergeys of the world anonymously collaborate to beat the boys at their own game right in front of their eyes? make them spend more and more capital to make less and less per trade. sort of what guerillas have done for centuries with foreign invaders, but legal & nonviolent...starve the beast while pricking them with a million needles.
it's time to take the turf away from the naughty boys yes, but a tax ain't gonna do it...been there, done that. we should all know by now that government is not our friend until they have no other choice...and we aren't quite there yet.
We're on to you Mr. Smith.
That is, all of us who have taken the red pill.
There are lots of explanations why a tax won't help.Perhaps not...all I know is this:GS has a trading record which defies logical or mathematical explanation if full on cheating is ruled out.Let's call a spade a spade.GS operates a money siphon, they provide zero value to the non opaque functioning of the market while stealing with the best technology available.They need to be stopped.As the economy craters further I cannot help but wonder if the capital they are stealing might not be better used elsewhere in the system.And that is really the point isn't it?They are stealing via a totally opaque mechanism...I am calling BS right here.We need to stop the theft, now.And there has to be some vestige of accountability for the horrendous damage they have caused.
Yes, PeterPeter, thanks for the explanation. Now, I am much more fully convinced that HFT is completely useless and should be taxed out of existence. Why don't you go pitch pennies out back with some of the illegals to fulfill your compulsion to squeeze the cents out of life?
Yes, I am pretty much out of the markets now that they have become detached from fundamentals. The run up seems a HFT induced bubble. I'm sure the HF traders will be out well ahead of the pension funds and 401K accounts when the SHTF. They are masters of the game of making themselves wealthy with no heed for the economic waste they leave behind.
ah, so you arent comfortable dealing with more perfect markets......the little imperfections are where you prefer to dabble
We know how HFT or algo trading works or suppose to work. It's obvious you don't understand how the psychology of the market has changed as the computers have taken over. Removing the human emotion of fear and greed produces a market of no confidence. Who cares if you playing the spreads, the problem is when market psychology turns negative, your computers pull all their bids and stocks get destroyed. Yes you won't care but all those that hold 401(k)s can't handle the computer induced volatility.
Right now there's zero way to value anything in this market, everything's just a "bot" trade.
Not only would common sense say otherwise (computers do not fear market turn downs, but instead analyze the opportunities to buy at what they calculate are prices below fair value), but the downturn in 2007/2008 proved this point.
In a market free-fall, with the exception of stocks that the SEC prevented from being sold short, there were no major air-pockets (stocks with no bids). The markets were incredibly orderly in their adjustment.
Contrast this to the 87 crash, or the crash of the 30s, and you should take away that the computers lack of fear and intense competition with each other provides for a more stable market during downward corrections.
> It's obvious you don't understand how the psychology of the market has changed as the computers have taken over.
I disagree - and suggest that you read Edward Chancelor's excellent book "Devil Take the Hindmost".
I am not much of an investor, so I maybe be completely off. But I have been wondering.
Why is it a good thing to artificially create demand for stocks? Why is it better to artificially shrink the bid-ask spread of stocks? If a stock has a large bid-ask spread, shouldn't investors simply take that into account? (Because the spread will be there when you sell, would it really matter whether it is 1 cent or 10 cents?)
Also, doesn't HFT cost investors more in the end because it distorts stock prices more than it narrows bid-ask spreads?
I appreciate any educated comment.
Shrinking the bid-ask spread is not creating artificial demand, it is bringing natural buyers and sellers together.
Jack wants to buy Exxon at 10AM, Jill wants to sell Exxon at 10:30AM. Market makers ensure that Jack can buy shares at 10AM and that Jill can sell it at 10:30.
For the benefit to the market of bridging the temporal gap between the 2 natural sides to the order, they make a spread.
Over the long haul, the spread is a good bet - but on any individual trade, there is material risk, since the price can move after 1 leg of the transaction is complete.
My question to you is, how was the drop in Nov 2008, for example, proof that machines made the drop any better?
Sure there were bids, but the point people are trying to make here is that the bids were most probably from people! The machines simply got turned off because the HFTs programmers knew they would pick up massive amounts of anything below VWAP. Clearly, the VWAP on days like with the 777pt drop would be foolish for a human to buy, but algos would be all over that.
Machines do not get scared. They are programmed to buy when they calculate there is good value and sell when things are over-priced.
This is quite a distinction from well established human behavior, in which fear of loss is a more powerful motivator than greed (there is ample research into this, much from the folks at U Chicago as well as some Israeli game theory folks).
There is no evidence I can point to on either side that says the machines were more of the buyers than the humans in 2008, save for my own software which was very active at that time (i.e. not turned off during one of the best trading opportunities of my lifetime).
Thanks peterpeter. Your explanation is most helpful. I see this occuring everyday, intraday. Personally, I like tight spreads. If you know the game, you can game the game.