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CBO on Tobin Tax - "Don't do it!'

Bruce Krasting's picture




 

The Congressional Budget Office (CBO) explored the consequences of a Tobin tax, after it was asked to throw in its two cents in regarding proposed legislation, H.R. 3313 / S. 1787. The proposed new law has a very catch title:

 

“Wall Street Trading and Speculators Tax Act”

Who wouldn't like something like that? For a country that (A) is desperate for revenue and (B) whose populous hates financial fat cats, speculators, monstrously paid bankers, and ridiculously paid hedge fund execs, a transaction tax is an easy sell.

I’ve taken grief on these pages with my position that taxes are a necessity. “Zero” is not the right number. The only questions are who pays and how much. With that said, it’s hard for me to push against a transaction tax. But I’m against this. The costs will outweigh any benefits that are created. I think the CBO agrees. Some bits from the report (Link):

For a transaction involving a stock, bond, or other debt obligation, the tax would be 0.03 percent of the value of the security.

Gee! Only .03%! Hardly worth noticing! Actually it is. Based on recent turnover  the cost of the tax would be $1.7mm every day for those trading AAPL. For GE and BAC, it comes to a rake of $327k and $425k, respectively. That’s real money.

The argument will be put forth that the tax is only a few pennies. A long-term buyer of AAPL would have to pay a total of only 24 cents to buy/hold/sell a share. For BAC, it's only 3/8th of a cent (.0032).

The transaction tax on Government bonds will only be applied to maturities over 100 days and not applicable to any new issuance. So if you were looking to park $100k in T notes for a year, you could avoid the tax by participating in the government’s auctions. That’s stupid. No one will do that. People will call their brokers and it will cost them an extra 30 bucks to own the Note.

The US bond market is very complex. It has nothing to do with retail demand. A substantial portion of the $10T of Treasury plus $7T of Agency paper is in perpetual float. I estimate that at least one third of the outstandings have no permanent home. It sloshes about the globe based on a variety of macro forces. How many times do they  “slosh” in a year? Much more than you might think. The number is a minimum of 5Xs. (I think it is around 7Xs, it could be as high as 10Xs) Using the low estimate, the annual float turnover impacted by the tax equals $25T. That teeny weeny tax would therefore suck $8 billion out of the market. That’s a very big deal. The CBO sees this pretty clearly:

Securities that are traded frequently, such as Treasury securities, would be more affected than securities that are traded less frequently.

 

The proposed transaction tax would lay waste to the HFT crowd. Their spreads are far too small and their volumes too high, to not have their business models get crushed by a Tobin tax. Many will cheer, myself included. But a sudden death of the algo computers would be very destructive.

The tax would also decrease the volume of transactions and would make some types of trading activity—such as derivatives transactions to manage risk and computer-assisted high-frequency trading—unprofitable.

 

This is about the money and how much one keeps. So every effort will be made to divert trading activities outside of US tax jurisdictions.

Traders would have incentives to avoid the tax either by trading offshore or by creating new financial instruments that were not subject to the tax.

 

As the trading activity goes outside of our borders,  so will all those traders and their high paying jobs. Also would go the thousands of back office/ support staff that goes with this.

As foreign holders of U.S. securities moved their transactions abroad, more of the market could go with them, which could diminish the importance of the United States as a major global financial market

 

All taxes have consequences. A Tobin transaction tax would be no exception:

In the short term, imposing the transaction tax would probably reduce output and employment.

Beyond the first few years the tax’s net impact on the economy is unclear.

 

Unclear? This is pretty clear:

The transaction tax would raise the costs of financing investments to the extent that it made transactions more expensive, financial markets less liquid, and management of financial risk more costly.

A net change in the amount of investment would in turn affect GDP and employment. In the short term, a decrease in investment would lower demand for goods and services and thus reduce output and employment.

 

Reduce output and employment? Just what we need.

These consequences are not the ones that worry me. I’m concerned with liquidity. What will happen when 50% of short-term trading is eliminated? The CBO has an answer for that:

The tax might discourage short-term speculation, which can destabilize markets and lead to disruptive events (such as the October 1987 stock market crash and the more recent “flash crash,” when the stock market temporarily plunged on May 6, 2010)

 

How might the markets welcome a transaction tax? I say this would get a huge thumb’s down. If you believe that wealth in 401Ks drives the economy (I do), then this will bring (another) recession. The CBO agrees, sort of.

Initially, the transaction tax would reduce the value of existing financial assets, because investors would not be willing to pay as much for assets that had become more costly to trade. That reduction would produce an immediate—though probably small—decline in wealth for people who owned financial assets when the policy was enacted.

 

Note: The CBO are a bunch of bean counters. They have not the slightest idea what the markets may do if this tax was enacted. When they say the consequence to assets values will “probably be small” they are making it up. (A Wall Street broker is not allowed to say things like this. The outcome is not predictable)

This is not a tax on speculators and guys who wear white spats on Wall Street. This will impact all the pension and savings plans:

The transaction tax would also affect the funding of state and local pension plans ($3 trillion as of June 2011). Besides initially reducing the value of their existing assets slightly, the tax would raise transaction costs for pension plans. Both of those effects would increase required contributions to the plans.

 

Note: There’s that “slightly" thing again. Shame on the CBO for soft peddling the risks.

I wouldn’t be surprised to see that a transaction tax becomes a political football in the next election. Obama will support it. The Republican candidate will oppose it. If the election were tomorrow, Obama would handily beat either Newt the Fool or Mitt the Suit. Unfortunately, I think a transaction tax, and all the bad things it will bring, is in our future.

.

 

 

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Wed, 12/14/2011 - 19:30 | 1980992 moneymutt
moneymutt's picture

clearly, any implementation of this would need some sophistication...this overview on wikipedia is pretty light, but provides some food for thought

http://en.wikipedia.org/wiki/Tobin_tax#Sweden.27s_experience_in_implementing_Tobin_taxes_in_the_form_of_general_financial_transaction_taxes

policy wonks and economists could be capable of trying this and testing this to see if it conuts uld work in ways imagined, however, policy wonks will not get to write the law, it will get written by some gross sausage compromise bend to political hostages and tricks.

Likely it will be written in a way guarantee to fail or made to look like a failure for a few weeks or months.....I'm an engineer, I just want to know what would the real data show if we could test this

Wed, 12/14/2011 - 11:08 | 1978521 Mediocritas
Mediocritas's picture

With HFT as it is, we're effectively already paying a tax, just that we're paying it to the private sector rather than the public sector. Every time you submit an order and it routes slowly through the ether being front-run by more nimble bots taking advantage of superior latency, the difference between what you *should* have paid and what you *actually* pay is the HFT metered tax.

Bring in a Tobin tax and the HFT shops are dead. One tax replaces another, difference is that the proceeds of a Tobin tax go towards government activities (funding the military, social security, bailing out banks, etc), whereas the proceeds of a the HFT delivered tax go to bunga bunga. Hard to know which is really best but if I have to choose I'll go with the Tobin tax because it results in a more healthy market. Stock traders will notice better price discovery, more intelligence in quote setting, less churn (more signal less noise in quotes) and a probably IMPROVEMENT in execution prices with a Tobin tax in place. I don't give a shit if spreads are wider if the quotes either side are backed by intelligence and research. Much better than what we have now where quotes mean nothing at all.

The jobs lost are irrelevant. They're waster jobs, contributing exactly jack shit to the real economy. Maybe some of the bright sparks fired from the HFT game might turn their skills to something that's actually useful like designing more efficient farm machinery. The kinds of jobs that will be lost are the kinds of jobs that actually harm the economy by existing. Slash 'em.

Onto TSYs. Yes it will effect churn, which is good because churn is a symptom of a sick system. Whatever happened to buying TSYs with intent to sit on them for years and earn the coupon payments? Half the reason our current yields are so badly out of touch with reality is because NO-ONE actually holds to maturity. Not one single shit is given about yields because the real money is in repos (shadow banking with TSYs acting as high-powered money / vertical money / reserves) and provided TSYs are AAA collateral nobody cares about yield which means the govt can get away with murder because bond traders don't punish profligate spending. If a Tobin tax screws all of that up then I say bring it on.

A transaction tax kills the churn. It limits the shadow banking system, it kills HFT, it forces the govt to be wiser with spending as it brings some sanity back to bond prices. It will absolutely cause chaos and volatility in the short term. So what? Things will eventually stabilize and, when they do, the system will be more stable than now and much more fundamentally healthy.

Bring on the chaos and kill off the beast(s) already.

Wed, 12/14/2011 - 11:28 | 1978695 Bruce Krasting
Bruce Krasting's picture

Like I said, I think this is in our future. So you might get that chaos you're looking for.

b

Wed, 12/14/2011 - 10:28 | 1978352 DOT
DOT's picture

There should be absolutely no taxes added to the stinking heap we already have.

I want something in the nature of a substitute.  This problem will not go away.

Our politics must change before any meaningful change to taxation can be made.

Our government must be able to fund its opperation. 

At the center of the problem is the question:  What do we want to pay a government to do ?

It may be that the only purpose of a government of free people is to assure an open and un-coerced market place, in which case a transaction tax may be the most fair.

Wed, 12/14/2011 - 10:26 | 1978344 ZackAttack
ZackAttack's picture

With fewer bots front-running your index fund's buying and selling, I bet it improves the dollar-cost-averager's performance more than enough to offset the loss of those rentier jobs.

A net benefit to society.

As it stands now, retail exists specifically to be shucked and skimmed. The retail investor won't come back until: a) they have a job that offers some discretionary capital for investing and b) they perceive that they're playing on a level field with everyone else.

Wed, 12/14/2011 - 09:51 | 1978235 mombers
mombers's picture

How about a land value tax and eliminate all other taxes except booze, ciggies and petrol? Land can't be moved offshore and if someone refuses to pay, you foreclose. Also, most government activities (police, roads, railways, parke, etc) increase the value of land, so it is not eanred wealth for the landowner and hence fair game for taxation

Wed, 12/14/2011 - 09:48 | 1978228 centerline
centerline's picture

Pretty shitty position.  Remember what the markets are supposed to be for - capital formation.  Not for "trading" in the sense of what the market has become.  Day trading has become millisecond trading.  The mechanisms through which capital flows have become nothing more than mob-operated casinos.

But, don't worry, since the mob runs the place, the Tobin tax won't happen.  

Wed, 12/14/2011 - 09:32 | 1978190 csmith
csmith's picture

Rehypothecation, "fractional reserve" investment banking and HFT have NOTHING to do with capital markets raising money for real investment, and should be taxed, as they are a cancer on our financial system.

Wed, 12/14/2011 - 09:30 | 1978180 dcb
dcb's picture

from you description the tax sounds perfect. I know you read a lot, but there is a wealth of literature about how the financialization of the emerican economy is what is crushing it. Of which I agree. wow imagine all those high paying jobs of traders, etc. leave or people actually become engineers, or engage in some suefull aqctivity instead of stealing from the public. Since I'd like to shoot many of the3se wealthy jobs types you describer, or boil them in oil. No loss.

 

Plus I am a firm beliver anythng the financial community screams about so much is good for america. you eever heard of a vat tax. all those people i8n europe who aren't in finance paying 15% on every item they buy. you cpnfuse the markets with the economy, and that is the problem with the fed.

Wed, 12/14/2011 - 11:33 | 1978731 Bruce Krasting
Bruce Krasting's picture

Well put. One thing, I don't confuse the markets with the economy. The markets are the economy. Whether that is right or wrong is something for history to decide. But that is the reality today. That will be the reality for the next decade at least.

So if we tax the markets (as I think we will) the economy will suffer. When that happens stockholders and those with assets get hurt. But those who have no assets get hurt the worst.

 

Wed, 12/14/2011 - 09:24 | 1978165 dcb
dcb's picture

the tax shouldn't be a percent, it should be a cost per transaction. the goal is to eliminate hft, to cut down on fequesnt trading. sorry but I support this tax. and I don't think it will happen

Wed, 12/14/2011 - 09:31 | 1978187 dcb
dcb's picture

anybody every discover a tax teh finanial communtiy finds ok. we can't tax carried interst, etc. give me a break.

Wed, 12/14/2011 - 09:20 | 1978154 DoctorOfLove
DoctorOfLove's picture

Order cancellation tax.  Kill off the HFT crowd.  Doesn't bother anyone else.

Wed, 12/14/2011 - 09:20 | 1978153 DoctorOfLove
DoctorOfLove's picture

Order cancellation tax.  Kill off the HFT crowd.  Doesn't bother anyone else.

Wed, 12/14/2011 - 08:57 | 1978104 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

When all solutions become a game of Russian Roulette, I'd say it's time to find a new game but the current logic seems implaccable.

Wed, 12/14/2011 - 08:57 | 1978102 spanish inquisition
spanish inquisition's picture

Couldn't you accomplish the same thing by trading at 5 cent levels without taxing?

Wed, 12/14/2011 - 08:35 | 1978040 SDS Trader
SDS Trader's picture

I assume the above question about real-world examples was rhetorical. 

Sweden tried this sort of tax in the early 1980's.  It was a disaster.  Trading volume dried up by 90% (no algos then).  They lost more in capital gains tax revenue than the Tobin Tax pulled in.

I don't think the people who are for this sort of Robin Hood tax understand it will affect them enormously as well.  401K mutual funds churn stocks constantly; that's why there were so many problems with them starting in the early 90's when the stock market boomed and they had chummy relationships with brokers who showered them with gifts so they would trade the funds' holdings all the time, all at the expense of the fund participants.  They still like to churn stocks, and those pension funds and IRA's and 401K's that hold them will earn far less.

If people don't want HFT's then ban HFT activity.  Don't allow the sort of trades that they commit.  But don't tax legitimate traders that don't flood the markets with thousands of phony orders every second and try to make money off millisecond delays.

This is the worst sort of "disincentive" tax there is.  It's like taxing a car dealership every time a client walks in the door and out, no matter whether they buy a car or not.  States managed to deal with the equivalent of "HFT car dealers" that used bait and switch tactics and the like.  But what about the legitimate dealer who does not break any laws?  Sooner or later the dealer, knowing they can only close a certain percentage of walk-ins, is simply going to go away.  So is the service department.  So are all the jobs that dealer provided.  And on and on and on...

Wed, 12/14/2011 - 08:37 | 1978066 James-Morrison
James-Morrison's picture

I propose the posters tax: a .03% tax on all blog and forum comments. It would generate billions and help cut back on subversive anti-government talk.

Clearly the amount of posting sucks bandwidth from the Internet, and adds little to country's GDP.

Maybe extend it to tweets.
/sarc

Wed, 12/14/2011 - 08:02 | 1977986 my puppy for prez
my puppy for prez's picture

More $$$ for the bankster war machine, bitchez!

Gotta pay for those dropping drones somehow....lol!

Wed, 12/14/2011 - 06:06 | 1977874 falak pema
falak pema's picture

Tax the hell out of the speculators who are drinking the blood of nations; innocent people led to the debt slavery trough by these Oligarchs. Its time to shut down Casino Royale, regulate tax havens, Corporate off shore operations with phony transfer pricing, not just in one country but world wide, and prohibit and prosecute all financialised activites that are naked bets (not linked to physical transactions). And FORGET the sleazy arguments, sham fig leaves, justifying this sleight of hand 'cos it 'oils' the wheels of globalised finance! My eye, it does that! Just look at "rehypothecation" racket, which is, IMHO, a needle in the huge bonanza of synthetics shit pile haystack of this financial ponzi. As in the case for all the other Reagan/Bush/Clinton type legislations promoting non regulated 'sleights of hands', it is protected by phony FED type rule 'T WHatever' that allows you to "rehypothecate", in other words to CHEAT with basic prudential fiduciary rules; salt and pepper of the faith we depositors put in banks. And that OILS THEIR pockets and bonuses, not our accounts which it empties! WHen the mother of the ponzi is the FED itself, God help the people! And God bless Alan Greenspan, Hank Paulson, Bernanke and Geithner as scions of Oligarchy "virtue", saviours of civilization doing God's work.

But if by chance miracle you do achieve that new tax regulation world wide,  like Hercules cleaning these Augean stables stinking to high heaven, we'll bleed WS/CIty/ off shore banking paradises, and we'll kill the power generated for the Oligarchs by the 25 T stashed there; the privatised hoard of profits that corresponds to the socialised debts on nation-state balance sheets. ANd THAT would really be challenging Caesar, by recrossing a Rubicon. This time in the name of the PEOPLE and the REPUBLIC. Now that is 14 JUly, Bastille day stuff! If we could pull that hoard back into the real economy, to pay for all the damages inflicted...Dream On LAfayette's and Danton's sons.

Wed, 12/14/2011 - 04:06 | 1977821 Widowmaker
Widowmaker's picture

Dear Bruce, I'll trade you the tobin tax for the income tax.

JQ Public et. al

Wed, 12/14/2011 - 11:37 | 1978762 Bruce Krasting
Bruce Krasting's picture

If this were truly about a trade, then I would agree with you. Lowering income taxes dollar for dollar with a transaction tax would be beneficial in my opinion. The negative consequences to markets would be offset by an improved fiscal position.

But that is not what this is about. This is a new tax. It will be used to support a government that is already too big. There will be no offsets elsewhere.

Wed, 12/14/2011 - 03:08 | 1977785 ConfederateH
ConfederateH's picture

The only questions are who pays and how much.

WTF?  The only question is how long are you willing to support bloated and corrupt government like the US has.  Before anyone even starts talking about new taxes the issue is slashing government, clawback of government pensions and cleaning up the toxic mess that is the existing tax code.

If the federal government was 3% of GDP, state government 3% of GDP and local government 4% of GDP then we could start discussing ways of tuning sources of tax revenue.  But to talk about more tax-food for the obese government in Washington is something only progressives like Bruce Krasting are talking about. 

Wed, 12/14/2011 - 02:15 | 1977715 Heyoka Bianco
Heyoka Bianco's picture

So more regulation in a sector where existing regulation is ignored and/or never enforced? Problem solved!

Even if it survives, we all know how this plays out: after a few years of evading or ignoring the tax whilst continuing to bank huge profits, a few of the lesser lights get sternly-worded letters, and if someone is jut hopelessly egregious in their thieving, they sign a consent decree neither admitting of denying wrongdoing and get slapped with a "fine" amounting to about .0000003% of what they owe and about .00000000000000000000000000000003% of their profits.

How can the solution to ineffective government be giving more money to those who have misspent the trillions we've already given them?

Wed, 12/14/2011 - 03:01 | 1977781 moneymutt
moneymutt's picture

So if your local police force is corrupt your solution is to defund it, and have no democractically controlled law enforcement? The solution to corruption is more democracy, not abolishing democracy.

Becuase cops are sometimes corrupt, we should not have cops, but rather let everyone enforce law and do security themselves?

Wed, 12/14/2011 - 03:02 | 1977780 moneymutt
moneymutt's picture

Dbl post

Wed, 12/14/2011 - 00:47 | 1977512 mark mchugh
mark mchugh's picture

Well Bruce, this is probably the poorest reasoned post I've ever seen from you. 

Wed, 12/14/2011 - 11:41 | 1978783 Bruce Krasting
Bruce Krasting's picture

Actually this is not my reasoning. All those red quotes were from the CBO.

I agree with CBO that a Tobin tax has many hidden consequences that will outweigh its benefits.

Wed, 12/14/2011 - 01:01 | 1977553 Bear
Bear's picture

Wow Mark, you haven't read a lot on this site

Wed, 12/14/2011 - 08:48 | 1978085 weinerdog43
weinerdog43's picture

Our friend Mr. Krasting has loads of posts worse that this one.  Sheesh.

Wed, 12/14/2011 - 00:23 | 1977461 shinyindallas
shinyindallas's picture

HFT trading is a tax on the market, along with dark pool trading. The money that is "lost" by the tax will be allocated somewhere else, maybe somewhere productive. HFT trading really produces nothing. This will trim the size of the financial sector which is a good thing at this point.

Wed, 12/14/2011 - 01:49 | 1977667 moneymutt
moneymutt's picture

HfT and slower churn by speculators is already unproductive skimming money from the market. Debit fees were unpordictive skimming from markets. High speed speculation lines people's pockets for doing something of no value. Anyone hedging a market becuase it is a part of their business, or, making long term investments, or even a few month bet on something will be barely be touched by this, while those making money in a way that does not add to liquidity or value will be Impacted by it.. So be it.

Funny, we have no problems signing free trade agreements that guarantee our manufacuring employees will have their job outsourced to foreign countries, but heaven forbid HFT trading employees lose their jobs to some Indians because of a tax.

Bruce, are there no real world examples, experiences with such a tax we could learn from? No country has ever done this?

I have no doubt there will be unintended consequences to this, just as limiting debit fees has lead to banks, in a fit of revenge and attempt to get bad press about that reform, removing the price break for debit swipes they gave to merchant selling low cost items. The banks gave them the price break originally to encourage debit use, guess they want to discourage use now.

If unintended consequence as bad as you say, law will get changed, but only way to find out is do this, and then tweak it as need be.

I would rather the govt get the skimming from transactions
churn and pay down debt, or use for FDiC or whatever, than a few smarties get all the money by co locating their servers with NYSE.

Wed, 12/14/2011 - 00:16 | 1977426 barliman
barliman's picture

 

Bruce,

You've been on an "it's inevitable" roll lately.

Lots of things you say you don't like but you say are going to happen anyway.

Just a thought, if you don't like something - why not say so and directly state arguments based on your experience that others (no, not the OWS trolls +1'ing each others posts) on how the problems can be fixed?

More taxes? Reminds me of a "design requirement" that was put in place during the last few years of the USSR/Warsaw Pact. All the senior engineers and construction managers working on a bridge over a deep valley in Eastern Europe were required to stand directly underneath the bridge while loaded trucks were driven out onto the bridge until it was carrying the full load it had been designed to carry.

The bridge collapsed ... killed all the engineers and construction managers (a few truck drivers too!). Each of the senior people had been using their "position of influence" to skim what they could in the way of concrete, steel, paint, etc to sell on the black market and obtain hard currency. The "design requirement" that had the pool of skimmers under the bridge was a very pragmatic solution to a growing problem. It was, in theory, a good deterrent.

Except, it really didn't work.

More taxes? Why not? The economy can take it ... can't it?

barliman

Wed, 12/14/2011 - 00:01 | 1977373 hivekiller
hivekiller's picture

Isn't the purpose of the Tobin tax to provide funding for world govt.? Who are they kidding?

Tue, 12/13/2011 - 23:44 | 1977289 I did it by Occident
I did it by Occident's picture

where's the squid when you need them, they should be all over this ASAP to squash it.

Tue, 12/13/2011 - 23:39 | 1977270 I did it by Occident
I did it by Occident's picture

but what about the leequiditeeeeee!?

Right when the market is having  trouble with liquidity, would not the Tobin tax be a tax on liquidity?  Seems rather retarded to me.

 

Tue, 12/13/2011 - 23:36 | 1977254 penisouraus erecti
penisouraus erecti's picture

What's the old adage, tax what you want less of, and subsidize what you want more of?

Wed, 12/14/2011 - 00:41 | 1977499 Problem Is
Problem Is's picture

I guess we wanted more corn syrup, more spying on citizens and more Wall Street Bankster fraud...

Tue, 12/13/2011 - 23:26 | 1977202 knukles
knukles's picture

No more taxes.

Wed, 12/14/2011 - 00:39 | 1977494 Problem Is
Problem Is's picture

End the Fed and the Income Tax

A 1% Wall Street Transaction tax means an end to the Income tax in addition to all the chopping I listed above...

Tue, 12/13/2011 - 23:19 | 1977182 WTF_247
WTF_247's picture

They have been at this for decades.

 

The govt just cannot keep their hands off the treasure trove of money flowing through the stock market.

 

However, the CBO crew are idiots - their analysis is subpar on this issue to say the least.  

Lets look at a bit of history to put it into perspective:

 

Prior to the mid to late 90s, stocks traded in 1/8s to 1/16s increments.  This provided enough incentive for broker dealers and speculators to make a market in stocks - that is buy from sellers and sell to buyers and thereby making the spread.

Now I am not saying there were not collusive abuses - there were.  The solution was to trade stocks in penny increments.  Over the period of a few years, there was no profit in it for broker/dealers to risk their own capital to provide liquidity.  This was an unintended consequence.

Next came the ECN networks.  Instinet had been around for decades before the others joined in, but the quotes on instinet were not publicly tradeable - think dark pool for wall street traders ...

The penny increments made it easy for the ecn networks to take over.  Because they charge traders from a fraction of a penny to a few cents per share to take liquidity (lift an offer or hit a bid) that became the defacto method to make money with absolutely no risk.  Goldman, JPM, Chase and others all jumped into the game.

This narrowed spreads which had started to widen as market makers decided it was not worth it to take risk with no reward.  The only time you would see them on the bid or offer for any reasonable amount of stock was if they were actively working an order in hand.  Otherwise it was 100 shares and move.

The narrow spreads enhanced the ability of computer models to actually overcome the spread in a stock - which was a complete unknown prior to penny spreads and ecns.  Now you could actively measure the time of day, the day of the week, whether its earnings season, news etc- and know what the actual spread would be and the expected slippage and size of order that could reasonably be executed.

This builds and builds as computers get faster and notably the internet speeds get faster and faster.  The exchanges want money, so its a no brainer to let firm ABC co-locate at the exchange in return for $250,000 per month payment per server (I am guessing here, but by no means is it cheap).

So now we are at today - I think the HFT guys manipulate the market, but they should NOT be forced out.

 A simple solution to make every order valid for 2 seconds would solve most of the issues.  That and making sure they have GOOD MONEY for 100% of the open orders at any one time - meaning every order in, you have to have money to pay for and assume it will be filled.

If you tax them, they will leave.  While that may make some "feel good to stick it to those aholes", the unintended consequences would be massive.

 

The spreads on stocks would immediately go to 5-10c or more.  On something like AAPL, it would probably be 50c to 1.00.  There would be next to no liquidity.  Try to buy 500k shares of AAPL and watch it move up 25 points.  Just remember 1999 and 2000 - that would be repeated now except it would not only be up.  

 

The cost to regular investors would be 4x to 8x any taxes brought in.  This is in massively increased cost to trade.  You now have a huge spread.  And what do you think will happen to that 5.00 or 10.00 commission??? GONE - firms have to make money somehow.  Computers cost money.  Websites cost money.  Employees cost money.  Offices cost money.  Volume drops massively, commisions go up massively.

 

This is yet another "social experiment" which plays on the populist crowd and makes a few feel good.  It would be a huge mistake to actually undertake.

P.S. - on another note, the government is incredibly inept in "guessing" revenue.  They expect volumes to continue at current rates, and build in growth to those numbers.  This is what they pull the revenue numbers from.  Within a year of enacting this, the revenue numbers will be severly below estimates.  Every revenue-generating program enacted has the money spent far in advance of any actual dollars coming in.  This will be no different.  When revenue is low, what do you think they are gonna do??? Cut spending of the "expected money"?? If you believe that, I have a bridge to sell to you.  They will inevitably raise it.  When volume drops further, raise it again.  

The average commission charged is literally fractions of a penny for anything over a few thousand shares.  I can easily see this "tax" being double, triple or even more.

DO NOT OPEN THIS CAN OF WORMS - tax rates NEVER go down long term - they only go one way - UP. Once the govt gets a taste of fresh blood its the end.

 

 

Wed, 12/14/2011 - 08:15 | 1978024 onebir
onebir's picture

Agreed on govt & revenues, but wouldn't a sufficiently small transaction tax (ie 0.0001% gradually escalating to 0.001%) tame the worst excesses of HFT without collapsing liquidity or asset prices?

Tue, 12/13/2011 - 23:17 | 1977179 Problem Is
Problem Is's picture

1% Wall Street Transactions Tax on all Derivatives & HFT

Wall Street caused this economic collapse... Wall Street pays... Not the US citizen or taxpayer...

That said with the tax legislation we pass cuts to the following:

Cut The Pentagon to a Triangle
Close all foreign bases, bring all troops enforcing Bankster and US Corporate rule abroad home once and for all. Empire is over, bitchez... Cut the Pentagon budget down to $200 billion with a full audit and criminal charges for all douche contractors and generals involved in fraud...

Eliminate Homeland Insecurity ($80 billion a year) NSA, CIA, HUD, Energy, Education...

Cut ALL of the Following:

Agencies within the Executive Office of the President:

Agencies within the Department of Commerce:

Agencies within the Department of Defense:

Agencies within Housing and Urban Development: Agencies Offices      Corporation Agencies within the Department of Justice:

 Offices

Management  National Protection and Programs Portfolios Divisions Offices and Institutes
Wed, 12/14/2011 - 02:12 | 1977708 Thunder_Downunder
Thunder_Downunder's picture

You'd fix the US by rendering thousands of middle class government employees unemployed?

 

lol.

 

The house is too big, lets burn it down to make it smaller!  

 

Seriously, a little bit of my drink nearly came out my nose when I read this. lol

 

 

Wed, 12/14/2011 - 07:32 | 1977952 ISEEIT
ISEEIT's picture

Wouldn't fix it, but would definitely be a move in the right direction.

The house is rotting, unstable, and we all know it is going to collapse so lets get the f' out and after it has collapsed we can clear the debris and only then consider what might be done with the foundation.

Wed, 12/14/2011 - 18:28 | 1980759 Thunder_Downunder
Thunder_Downunder's picture

You guys have a major shortage of demand. 

 

Creating uncertainty amongst the largest employment sector in the country will only make it worse. See how well this kind of thing has worked in the UK and Greece.

 

If it's too big or unnecessary, you re tool it, or use natural attrition. Largescale job cuts in governemt = consumption implosion. You can't fix these things with rapid swings, any more than you can turn a panama sized frieghter on a dime. 

 

The numpties that voted down my comment just demonstrate their own ignorance of the real world. BUt I guess that's why we're all here on ZH.. navel gazing...

Wed, 12/14/2011 - 19:29 | 1980984 akak
akak's picture

You guys have a major shortage of demand.

Spoken like a true, dyed-in-the-wool, clueless Keynesian (but I repeat myself).

No further comment is necessary, other than to state that every one of your red arrows was well deserved.

Wed, 12/14/2011 - 20:03 | 1981104 Thunder_Downunder
Thunder_Downunder's picture

hahahaha.. Sorry what? Are house prices falling? Is your workforce participation rate at 1980s levels? 

 

So crushing your already megre retail segment, hiting whats left of domestic tourism and travel, and pushing the most mortgaged segment of society into bankruptcy is going to help is it?

 

Sacking thousands will somehow reverse the loss of manufacturing to asia? Lowering the velocity of money will help the domestic asset deflation?

 

You do realise, that when a 'gubberment' employee spends their paycheck, it doesn't disappear right? 

 

I'll help you out.. You need an education, so you don't sound so ignorant. Heres a basic start:

 

http://en.wikipedia.org/wiki/Keynesian_economics

http://en.wikipedia.org/wiki/Austrian_economics

 

I know, I know, cry on my shoulder. It sucks that the world isn't black and white doesn't it? I just want to pick a team and then scream about how crap the other team is to make myself feel better too.

 

Maybe if you smash enough windows, the economy will pick up.  Oh.. wait that's what you're advocating.. does that make you a keynes follower too?

 

Numpty.

Wed, 12/14/2011 - 01:05 | 1977574 Bear
Bear's picture

I see you would cut the OOFL ... good call Ms. O probaply doesn't need 30 helpers

Tue, 12/13/2011 - 23:41 | 1977274 LowProfile
LowProfile's picture

A good start.

Easier would just be a 50% reduction in salaries, benefits and budgets across the board.

If they can make more money in the private sector, or by selling their services to the private sector, by all means do so.

If not...  Well, that's just too damn bad.

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