Hey, they’ve got a new tax Hey, they’ve got a new tax campaign.
It’s the Robin Hood tax. A Financial Transaction Tax.
Yes, like all good like tax proposals, it’s just a measely 1/2 cent per dollar. A whooping 50 cents per hundred dollars. We can’t afford not to do it!
It’s transaction tax and not a profit tax, so whatever the sales price, just compute your tax. Buying and selling.
Don’t worry, you can still buy your Apple stock, but if they’re successful, you’ll need to pay $2.93 for every share of Apple you buy or sell at today’s prices.
Oh, and don’t forget to include your shadow tax on your 401K, those mutual funds will be paying it and most have a 85% turnover every year in stock trades. So you’ll be paying that 1/2 cent on almost every dollar in your IRAs and 401Ks.
UCGal
June 19, 2012 @
9:04 AM
Is your question on a yearly Is your question on a yearly basis – or lifetime basis.
$500 in tax is $100k in trades. I don’t trade that much a year. Maybe flu does. 🙂
Coronita
June 19, 2012 @
11:22 AM
UCGal wrote:Is your question [quote=UCGal]Is your question on a yearly basis – or lifetime basis.
$500 in tax is $100k in trades. I don’t trade that much a year. Maybe flu does. :)[/quote]
I think my tax would be bigger by an order of magnitude or two.
This is not going to fly… Because it would kill the entire brokerage business.
Brokerages thrive on transaction trade. A lot of folks trade a stock and move in and out of a position. It’ like taxing money that isn’t even yours, because the tax is determined by share price, not by how much is made/loss.
Totally ridiculous, and probably written by a bunch of stupid politicians, mostly socialists I’m guessing.
ucodegen
June 19, 2012 @
12:21 PM
I would do it.. but on one I would do it.. but on one condition:
That the presidents, vice presidents, member of house of representatives and congress as well as all state and city governors and their congresses return all pay for the past 6 years, including payments to retirement accounts and health benefits (past 5 years and future). They must also surrender any federal and state pension benefits. Their pay from this point must start at the pay rate of their office in the year of 2000 and use the same health and retirement system (SS + self contributed 401k) that most of the rest of us use.
Bill Gates has endorsed it. That’s interesting to me.
The more I think about it – the more I think it won’t have a big impact on me. I follow a couch potato portfolio model – so not a lot of transactions. http://www.bogleheads.org/wiki/Lazy_Portfolios
Yes – the underlying index funds have some trades… but since they’re index funds, they’re not trading a lot…
no_such_reality
June 20, 2012 @
8:24 AM
UCGal [quote=UCGal]http://www.robinhoodtax.org/
Bill Gates has endorsed it. That’s interesting to me.
The more I think about it – the more I think it won’t have a big impact on me. I follow a couch potato portfolio model – so not a lot of transactions. http://www.bogleheads.org/wiki/Lazy_Portfolios
Yes – the underlying index funds have some trades… but since they’re index funds, they’re not trading a lot…[/quote]
What about your CalPERs retirement funds?
Sweden did this in the 80-90s. The tax raised 3% of the projected revenues.
I turn about 25% of my portfolio, since the transaction would be 1% on the combine sell and replace buy, it would be an annoyance in my privately managed stuff.
My 401K through the company though would be another story, it would just be a 1% tax on my 401K, paid via increased expenses on the funds I own.
Bill Gates has endorsed it. That’s interesting to me.
The more I think about it – the more I think it won’t have a big impact on me. I follow a couch potato portfolio model – so not a lot of transactions. http://www.bogleheads.org/wiki/Lazy_Portfolios
Yes – the underlying index funds have some trades… but since they’re index funds, they’re not trading a lot…[/quote]
What about your CalPERs retirement funds?
Sweden did this in the 80-90s. The tax raised 3% of the projected revenues.
I turn about 25% of my portfolio, since the transaction would be 1% on the combine sell and replace buy, it would be an annoyance in my privately managed stuff.
My 401K through the company though would be another story, it would just be a 1% tax on my 401K, paid via increased expenses on the funds I own.[/quote]
I don’t have CalPERS retirement funds. I’m not a government worker, and except for a summer internship with the NOAA in college, and a part time gig at a junior college cafeteria, I’ve never been a government worker. (Both were super low wage, non-union, no bennies type jobs.)
You’re mistaking me with someone else.
Anonymous
June 20, 2012 @
12:18 PM
I like the idea in theory. I like the idea in theory. The stock market is nothing more than a gambling operation. At a sportsbook in Vegas, you effectively pay a tax to the house regardless if you win or lose. In the case of the stock market, the government is the house becuase they encourage/condone/enable this entire casino we call Wall St. Since the government is responsible for this, at least they should take a bigger cut.
davelj
July 2, 2012 @
11:12 AM
I generally like this idea as I generally like this idea as well. Whether it should be .5% or .25% or whatever is a political issue but I like the idea of a transaction tax.
It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.
It would also be a tax disproportionately paid by wealthy folks (who disproportionately hold or benefit from from the financial assets being traded).
If you trade very little, as I do, it would be a di minimis expense.
Hell, it might actually make folks start to think of stocks as pieces of businesses as opposed to pieces of paper to be traded. Truly bizarre notion, I know…
Generically, I like the idea. The devil, of course, is in the details.
Anonymous
July 2, 2012 @
6:57 PM
davelj wrote:It would all but [quote=davelj]It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.[/quote]
What defines a “stable” market anyway?
One without much liquidity is certainly not very stable, but “too much” liquidity is somehow “destabilizing?”
If a lot of people trade a little, that’s not destabilizing, but throw in a few people trading a lot, and that is somehow destabilizing?
At what point does the frequency of transactions cross the threshold into “destabilizing” territory? (based on what economic principle?)
Besides, what’s the goal the tax? To reduce liquidity and increase spreads? (It would do that.) How is that a good thing for anybody?
Or is the goal to reduce some vaguely-defined “destabilizing” phenomenon that HFT critics can never really identify?
BTW, there really aren’t that many firms doing HFT. Ending it (whatever that means) wouldn’t put many funds out of business.
Anonymous
July 2, 2012 @
8:46 PM
How does HFT benefit the How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.
Coronita
July 3, 2012 @
3:40 AM
deadzone wrote:How does HFT [quote=deadzone]How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.[/quote]
I sense jealousy there…And the irony. I thought you work in the VC biz. And yet to cheer for the demise of the equity markets. Very interesting…..
Anonymous
July 3, 2012 @
9:03 AM
flu wrote:deadzone wrote:How [quote=flu][quote=deadzone]How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.[/quote]
I sense jealousy there…And the irony. I thought you work in the VC biz. And yet to cheer for the demise of the equity markets. Very interesting…..[/quote]
Not sure I follow your logic here. You didn’t answer my fundamental question, how does HFT benefit anybody? You are making the assumption that VC needs HFT? Liquidity in markets is one thing, but an unnatural hyper-liquidity (aka volatility) due to gamblers front running the markets and effectively skimming money (a la Office space scam)? Explain to me how that benefits anybody except the gamblers themselves and why should the government encourage and endorse this scam? A transaction tax makes a lot of sense and it should have minimal effect on the average retail buy and hold investor.
What am I jelous of, that rich politically tied Wall Street bankers are able to manipulate the system to effectively steal money and I can’t? Sorry, no jealousy just outraged that the government allows this behavior and you should be too.
Anonymous
July 3, 2012 @
10:23 AM
deadzone wrote:Not sure I [quote=deadzone]Not sure I follow your logic here. You didn’t answer my fundamental question, how does HFT benefit anybody?[/quote]
Do we really need to answer that question before something can be “allowed.” How does anything benefit anybody? You seem to be assuming that every business activity should be illegal by default until it is proven that it benefits somebody.
In exactly what court should we hold these trials? It would be a pretty busy court…
The answer is trivial: HFT traders benefit the people who trade with them. If they didn’t benefit, they wouldn’t take the other side of the trade.
Have you ever heard anybody complain that the counterparty to their trade was an HFT firm? What would be their complaint?
[quote]Liquidity in markets is one thing, but an unnatural hyper-liquidity (aka volatility) due to gamblers front running the markets and effectively skimming money (a la Office space scam)?[/quote]
Lots of subjectivity and bad assumptions packed into that one sentence.
“Unnatural?” What does that mean? “Hyper?” What is the threshold for “hyper?”
How does more liquidity become volatility? Try to explain that one with an example.
“Gamblers?” Please explain the difference between an trader and a gambler.
Skimming money? That’s simply impossible. If HFTs are responsible for most of the market volume, how can they be “skimming?” Is everybody skimming off of everybody else?
[quote]What am I jelous of, that rich politically tied Wall Street bankers are able to manipulate the system to effectively steal money and I can’t? Sorry, no jealousy just outraged that the government allows this behavior and you should be too.[/quote]
It’s pretty clear that, like most critics, you have no clue what HFT actually is. In fact, you don’t even know what trading actually is. You’re just repeating a bunch of myths and hysteria. The truth is actually very simple: HFT is just trading. There are no special rules that apply to them and there isn’t even any real definition of “high” frequency.
The barrier to entry into HFT is actually quite low. All of the market data and order feeds are available to anybody. They are expensive, and you need a certain amount of capital to trade effectively, but there is no special “club” that one needs to be in to trade electronically, “high frequency” or otherwise.
Coronita
July 3, 2012 @
10:55 AM
deadzone wrote:flu [quote=deadzone][quote=flu][quote=deadzone]How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.[/quote]
I sense jealousy there…And the irony. I thought you work in the VC biz. And yet to cheer for the demise of the equity markets. Very interesting…..[/quote]
Not sure I follow your logic here. You didn’t answer my fundamental question, how does HFT benefit anybody? You are making the assumption that VC needs HFT? Liquidity in markets is one thing, but an unnatural hyper-liquidity (aka volatility) due to gamblers front running the markets and effectively skimming money (a la Office space scam)? Explain to me how that benefits anybody except the gamblers themselves and why should the government encourage and endorse this scam? A transaction tax makes a lot of sense and it should have minimal effect on the average retail buy and hold investor.
What am I jelous of, that rich politically tied Wall Street bankers are able to manipulate the system to effectively steal money and I can’t? Sorry, no jealousy just outraged that the government allows this behavior and you should be too.[/quote]
I was answering your statement that “wall street and stock market is one by gambling machine that should be shut down”, and yet the VC business is all about inflating a startup company with unrealistic financials, pump them up to oblivion, dump them on the the market to mom and pop idiot investors, so that VC + banks + IPO founders can steal a shitload of money from idiot mom and pop…Just like Zygna, Groupon, Facebook, and about every web 1.0 company that was imaginable.. So, yes why do you still work for VC if you rail against the system so much?
I think we should regulate the VC business. If some of the IPO’s end up in a fiasco, the bank underwriters and VC’s and founders should be on the hook for returning the losses. And while we’re at it, I think we should regulate the salary and bonuses of VC’s too. Makes as much sense to me as this stupid proposed law (which isn’t going to happen imho).
I’m not sure if you’re so adamant about how shitty the system is, why you would continue to be part of it…
I guess most people these days want their cake and eat it too.
Anonymous
July 3, 2012 @
1:40 PM
flu wrote:I was answering [quote=flu]I was answering your statement that “wall street and stock market is one by gambling machine that should be shut down”, and yet the VC business is all about inflating a startup company with unrealistic financials, pump them up to oblivion, dump them on the the market to mom and pop idiot investors, so that VC + banks + IPO founders can steal a shitload of money from idiot mom and pop…Just like Zygna, Groupon, Facebook, and about every web 1.0 company that was imaginable.. So, yes why do you still work for VC if you rail against the system so much?
I think we should regulate the VC business. If some of the IPO’s end up in a fiasco, the bank underwriters and VC’s and founders should be on the hook for returning the losses. And while we’re at it, I think we should regulate the salary and bonuses of VC’s too. Makes as much sense to me as this stupid proposed law (which isn’t going to happen imho).
I’m not sure if you’re so adamant about how shitty the system is, why you would continue to be part of it…
I guess most people these days want their cake and eat it too.[/quote]
FLU, you have me mistaken for somebody else, I am not in the VC business. Also, while I argue that Wall St. is nothing more than a gambling operation, I never claimed it should be shut down, just needs a log more regulation. HFT is just one aspect that probably should be controlled if not eliminated.
Harvey, there is no distinction between a gambler and trader. “Trader” is nothing more than a Wall St. euphonism for gambler. And in terms of HFT not having an underiable consequences, your are a fool if you belive this. THe average retail investor is exposed significantly to the stock market through 401K, pension, etc. When these trading firms manipulate the market with their pump and dump strageties, eventually it is the rest of us who get burned. It is not a fair playing field and you know it.
UCGal
July 3, 2012 @
8:41 AM
harvey wrote:
At what point [quote=harvey]
At what point does the frequency of transactions cross the threshold into “destabilizing” territory? (based on what economic principle?)
[/quote]
Flash Crash is a good example of an unstable market.
[quote=flu]Great, so rather than giving middle class folks the ability to expand their income via passive investments, we’ll just tax them more so they physically have to work all the way until they are 65,70,75,80+.
[/quote]
Passive investors (buy and hold) won’t be impacted very much by this. It’s active investors – those that try to time the market, or day traders who will be taxed more.
Passive investors set up their asset allocation, rebalance once or twice a year and call it good.
Coronita
July 3, 2012 @
10:41 AM
UCGal wrote:
Passive [quote=UCGal]
Passive investors set up their asset allocation, rebalance once or twice a year and call it good.[/quote]
Depends on which “passive” fund you are in, and if it really is passive.
davelj
July 3, 2012 @
10:15 AM
harvey][quote=davelj wrote:It [quote=harvey][quote=davelj]It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.[/quote]
[quote=harvey]
What defines a “stable” market anyway? [/quote]
How about we keep it simple and call it the standard deviation of periodic returns (pick your period), which has increased dramatically over the last decade as HFT has proliferated. If memory serves, less than 5% of all firms (the HFTs) account for ~75% of all equity trading volume in the US.
[quote=harvey]
One without much liquidity is certainly not very stable, but “too much” liquidity is somehow “destabilizing?”[/quote]
You’re under the mistaken impression that all liquidity is of equal value – it is demonstrably not. When markets are generally rising HFT is arguably value-neutral to the financial system. When it is falling, however, HFT is dangerous because the HFTs essentially exit the market at the same time (with attendant effects not unlike the fabled “portfolio insurance” trade that exacerbated the 1987 crash). As soon as someone can show me a single study showing that HFT has reduced overall volatility over any period of time I’m happy to reconsider my position here. I happen to think that a financial system in which the the prices of a large quantity of assets are being set by a marginal trader that has no opinion whatsoever on value is very unhealthy. And there’s a lot of high-level opinion that agrees with me here.
[quote=harvey]
If a lot of people trade a little, that’s not destabilizing, but throw in a few people trading a lot, and that is somehow destabilizing?[/quote]
Yes, if the “few people” exhibit the characteristics addressed above.
[quote=harvey]
At what point does the frequency of transactions cross the threshold into “destabilizing” territory? (based on what economic principle?)[/quote]
Admittedly hard to define. But so are a lot of other things that we still manage to address… it doesn’t mean the issue shouldn’t be addressed simply because it’s difficult. The economic principles at hand are that excessive volatility (1) increases the cost of equity capital, (2) makes capital planning more difficult, and (3) generally gives the public – for whom markets are supposed to serve some benefit – the notion that the markets are casinos.
[quote=harvey]
Besides, what’s the goal the tax? To reduce liquidity and increase spreads? (It would do that.) How is that a good thing for anybody?
Or is the goal to reduce some vaguely-defined “destabilizing” phenomenon that HFT critics can never really identify?[/quote]
If the liquidity is only actually available when the markets are rising… of how much actual use is it? The liquidity disappears and spreads increase at precisely the time most participants need it most… as markets decline. So, as explained previously, this is really a “false” liquidity – it’s not real.
[quote=harvey]
BTW, there really aren’t that many firms doing HFT. Ending it (whatever that means) wouldn’t put many funds out of business.[/quote]
As noted above, the number of HFT firms is not huge, but… they tend to employ a LOT of folks and are large relative to the average fund. I bet you’d see at least 5%-10% of hedge fund employees looking for work. And the lost commissions to the brokerage industry would be substantial but survivable.
Anonymous
July 3, 2012 @
11:39 AM
davelj wrote:How about we [quote=davelj]How about we keep it simple and call it [market stability] the standard deviation of periodic returns (pick your period)[/quote]
Correlation does not imply causation.
If you are attributing the crashes of 2000 and 2007 to HFT you are going to have to make a much stronger case.
Lots of things have changed in the markets in that period. Notably the rise of retail, on-line trading (e.g. E-Trade), integration of international markets, and many other things. There has been lots of big changes in the markets in the past decade or so, mostly due to information technology. Not to mention international terrorism, wars, and fundamental economic shifts in the US.
A common misconception about HFT firms is that they attempt to “move” the market. This claim is completely backwards. Market manipulation has been around forever, but none of it could be described as HFT. Any attempt to move a market would require taking on a position that is exposed to market risk – exactly the opposite of what HFT firms typically do.
Market volumes have increased steadily for the past 200 years. In the long term, there is zero correlation between volume and volatility. And there is no economic principle that suggests that there would be (in fact every credible economics model tells us that more liquidity means less volatility. There is plenty of empirical evidence to support this.)
[quote]You’re under the mistaken impression that all liquidity is of equal value – it is demonstrably not. When markets are generally rising HFT is arguably value-neutral to the financial system. When it is falling, however, HFT is dangerous because the HFTs essentially exit the market at the same time [/quote]
This is flat-out incorrect on many points (and self-contradictory as well.) You claim the liquidity that HFTs provide is “value neutral” when it’s there, but bad when it goes away? You can’t have it both ways.
Generally, HFTs don’t care which direction the market is moving (some trading firms do, but I wouldn’t characterize them as HFT.) The core HFT strategies are as market-makers – they always attempt to minimize market risk by remaining “balanced” long and short.
This is a common flawed argument against HFT: “Liquidity is is good, but liquidity provided by HFT is bad.”
Look at the order book for any instrument and tell me how to distinguish between the “good” and “bad” liquidity. All liquidity reduces spreads, all liquidity improves pricing for investors. There is simply no such thing as “bad” liquidity – there isn’t really any way to distinguish different “types” of liquidity. A bid is a bid, an offer is an offer. The markets don’t know or care who it comes from.
[quote](with attendant effects not unlike the fabled “portfolio insurance” trade that exacerbated the 1987 crash). As soon as someone can show me a single study showing that HFT has reduced overall volatility over any period of time I’m happy to reconsider my position here.[/quote]
First, we’d have to define HFT to even perform that study (i.e. How high is high?)
Second, I don’t see why the burden of proof should be as you position it. You’re the one claiming it’s bad, without providing any evidence of a problem.
What happened in 1987 was not the result of “high-frequency” trading, because (by any definition) HFT did not exist back then. It is a common mistake to confuse anything related to “computers” as HFT (and we are never going to eliminate computers from trading, that genie left the bottle a long time ago…)
[quote]I happen to think that a financial system in which the the prices of a large quantity of assets are being set by a marginal trader that has no opinion whatsoever on value is very unhealthy.
[/quote]
Another flawed assumption: HFTs care very much about value, in fact that’s all their algorithms really do: calculate value. They certainly apply much more rigorous analysis of value than the typical retail investor. Also, terms like “unhealthy” are not meaningful. There is no notion in economics or finance of a “healthy” system of valuation.
[quote]Admittedly hard to define. But so are a lot of other things that we still manage to address… it doesn’t mean the issue shouldn’t be addressed simply because it’s difficult.[/quote]
It’s not that it’s difficult, it’s horribly subjective. flu trades at least 10x more than most of us (perhaps 100x more.) Is he trading at “high-frequency?” Is he contributing to market volatility?
(Not picking on flu, in fact my point is that he should be free do trade as often as he chooses.)
[quote]The economic principles at hand are that excessive volatility (1) increases the cost of equity capital, (2) makes capital planning more difficult, and (3) generally gives the public – for whom markets are supposed to serve some benefit – the notion that the markets are casinos.[/quote]
Sorry, but that doesn’t even make sense. First, you haven’t proved that HFT contributes to more volatility. Equity capital is priced by the market. Why is it “higher” if there more volatility? Volatility means up and down, right?
And people have considered the stock market to be “gambling” for close to 100 years.
[quote]If the liquidity is only actually available when the markets are rising… of how much actual use is it? The liquidity disappears and spreads increase at precisely the time most participants need it most… as markets decline. So, as explained previously, this is really a “false” liquidity – it’s not real.[/quote]
Even if this claim were true, I don’t see the problem. If HFTs exit the market, and liquidity returns to “normal” than what has been lost? Take away HFT and there would be less liquidity all the time. How is that better?
If the issue is participants leaving the market when it is falling, then a tax would not solve that problem, since the tax offers no incentive to stay in the market. The issue of liquidity leaving the markets has been around long before HFT, and has been (partially) addressed by regulations like the downtick-rule and market-maker requirements.
[quote]As noted above, the number of HFT firms is not huge, but… they tend to employ a LOT of folks […][/quote]
Not sure where you are getting that figure. They actually tend to be small relative to other “Wall Street” type firms (remember it’s computers doing all the work, not people.) Plus, because they rely heavily on key intellectual property (their trading strategies) they tend to be very secretive, which also keeps the size small.
I really don’t care what happens with HFT. It’s been good to me, but I’m out of that business aside from some occasional consulting. Very few people, even those in the financial industry, really understand what it is, and most opinions I’ve heard are based far more more on myth than facts. Most of the critics – including some journalists working for big newspapers – don’t really even understand the basics of trading.
The perception that HFT is somehow a “dirty” business is somewhat amusing to me. Since it’s based on math and algorithms, there’s really no opportunity for backroom deals or cronyism or any of the other shenanigans that occur in just about every other business. The computers and calculations don’t care who you know, or which politician’s palm you grease. The decisions are completely dominated by objective data.
But people will always be uncomfortable with things they don’t understand.
davelj
July 3, 2012 @
12:22 PM
Many of my opinions on HFT Many of my opinions on HFT are formed by a friend of mine who works at GETCO, with whom I’m sure you’re familiar if you work in the industry. He does not hold his own firm in particularly high regard, so he’s likely leaving soon. But I digress.
[FYI, regarding employment, GETCO employs over 500 people according to my friend, which would place them among the very largest funds in the world in terms of employees. Apparently it takes a lot of humans to operate the robots.]
Rather than wasting my time (and yours) going back and forth on this issue, we’ll have to agree to disagree.
While you raise some legitimate points above, you also mischaracterize a few of my points (e.g., I specifically pointed out that the ’87 crash was a result of PI, not HFT, as you claim; I didn’t attribute the crashes of ’00 or ’07 to HFT; I could go on). Also, frankly, if you don’t understand the relationship between equity prices and the cost of capital (which is directly impacted by market volatility – it’s an input in the calculation, after all)… then we’ll probably never see eye-to-eye on this.
In any case, we’ll see what happens. Personally, I don’t care greatly how it all turns out. My preference would be to see a financial transaction tax, as I’ve noted. But, as I’m not a trader… it will have minimal impact on me either way.
davelj
July 3, 2012 @
1:10 PM
For those interested in the For those interested in the most recent academic study published on HFT (this can be downloaded for free):
[Warning: Despite being a math minor as an undergad, some of the maths in this paper would take me longer to follow than I’m willing to put into it. Yes, I’m lazy that way.]
Abstract (note the last sentence):
We propose and study a stylization of high frequency trading (HFT). Our interest is an order book which consists of orders from slow liquidity traders and orders from high-frequency traders. We would like to frame a model which is amenable to the (seemingly natural) mathematical toolkit of separation of scales and which can be used to address some of the larger issues involved in HFT.
The main issue to which we address our model is volatility. An important question is how volatility is affected by HFT. In our stylized model, we show how HFT increases volatility, and can quantify this effect as a function of the parameters in our model and the separation of scales.
************************
Disclaimer: Clearly this isn’t the last word on the subject. And the assumptions and constraints that may diverge from the real world are piled up high. But… it’s certainly the most recent word duly judged by a highly sophisticated jury.
Anonymous
July 3, 2012 @
1:44 PM
davelj wrote:Many of my [quote=davelj]Many of my opinions on HFT are formed by a friend of mine who works at GETCO, with whom I’m sure you’re familiar if you work in the industry. He does not hold his own firm in particularly high regard, so he’s likely leaving soon.[/quote]
There was a lot I didn’t like about it myself, and I probably share many opinions with your friend. At the point I was most burnt-out on the whole business, I actually tried to find a good argument against HFT as I would have been happy to see the whole industry go away. But I never did find any criticism that held up to scrutiny.
I’m not going to argue whether GETCO is large or small because I don’t know what we are using as a basis of comparison, but I don’t see how taxing 500 highly-skilled people out of job could be a good thing on it’s own. There would have to be some substantial benefit to society to offset these impacts.
If we step back and look at the the criticisms of HFT, they are really not specific to the relative “frequency” of the trading, and always turn out to be separate issues altogether:
– Mistrust of computers in decision-making processes (no way to reverse that trend…)
– Misunderstandings about the benefits of financial markets and liquidity in general (anybody who characterizes trading simply “gambling” just doesn’t get it and is never going to like anything about HFT or any other type of trading for that matter.)
You are correct that I missed the point about cost of capital calculations. I’ve never done that in any professional capacity and I pretty much forgot about those formulas. (I didn’t think that formula was really used with actual market beta outside the finance 101 textbooks, but I could be completely wrong.) Even so, any relationship between HFT and cost of capital has got to be pretty dubious at best.
The general argument of “it won’t impact me” is easy, but problematic. There are lots of potential taxes out there the wouldn’t impact most of us directly. Of course everybody wants the other guy to pay.
CA renter
July 3, 2012 @
3:19 AM
davelj wrote:I generally like [quote=davelj]I generally like this idea as well. Whether it should be .5% or .25% or whatever is a political issue but I like the idea of a transaction tax.
It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.
It would also be a tax disproportionately paid by wealthy folks (who disproportionately hold or benefit from from the financial assets being traded).
If you trade very little, as I do, it would be a di minimis expense.
Hell, it might actually make folks start to think of stocks as pieces of businesses as opposed to pieces of paper to be traded. Truly bizarre notion, I know…
Generically, I like the idea. The devil, of course, is in the details.[/quote]
Agree very much with this.
Coronita
June 19, 2012 @
1:04 PM
So sick and tired about So sick and tired about people bitching about their financial plight…
Coronita
July 3, 2012 @
3:38 AM
Great, so rather than giving Great, so rather than giving middle class folks the ability to expand their income via passive investments, we’ll just tax them more so they physically have to work all the way until they are 65,70,75,80+.
Meanwhile corporations/hedge funds will probably be exempt from this rule. Just so we can end up paying for federal/state/local expenses that completely unreasonable in this economy, like public pensions and RE bailouts…
Makes sense to me…Actually, no it doesn’t. It makes me pretty sick frankly. You know what I really hate about a lot of people these days? They want to have their cake and eat it too. They want other people to pay all the new increased taxes, but at the say time they expect to continue reaping all the benefits they have (as unreasonable as they are) while not paying any of the new taxes.
Well. I know what I’m going to be doing with the 3.8% passive income surcharge I’ll be levied and the 0.9% surcharge from the Healthcare spending bill. I’m going to do my darnest to pass this cost directly on to the tenant. Because while I’m not charging the most I can on my rentals, I be making an adjustment to do just that, and will have no problem finding tenants still. And I’m going to find the most aggressive accoutants to report as much into my rental expenses as possible….So the folks that end up getting screwed isn’t completely me…but rather…yup the ones in a lesser strong financial position who are trying to save and buy a home for the first time….
davelj
July 3, 2012 @
10:26 AM
flu wrote:Great, so rather [quote=flu]Great, so rather than giving middle class folks the ability to expand their income via passive investments, we’ll just tax them more so they physically have to work all the way until they are 65,70,75,80+. [/quote]
Most “middle-class” folks don’t own stocks directly (or don’t own a lot if they own them at all). And if they do, they’re probably better off “investing” as opposed to “trading.” (I know some middle class folks who traded in the late-90s/early-00s… it didn’t turn out so well despite the absence of a transaction tax.) One wistfully wonders how we managed to survive as a society prior to the rise of the “trading culture.”
[quote=flu]
Meanwhile corporations/hedge funds will probably be exempt from this rule. Just so we can end up paying for federal/state/local expenses that completely unreasonable in this economy, like public pensions and RE bailouts…[/quote]
There’s no way that corporations or hedge funds would be exempt from the rule. The rule would, in fact, target hedge funds specifically.
June 19, 2012 @ 8:23 AM
Hey, they’ve got a new tax
Hey, they’ve got a new tax campaign.
It’s the Robin Hood tax. A Financial Transaction Tax.
Yes, like all good like tax proposals, it’s just a measely 1/2 cent per dollar. A whooping 50 cents per hundred dollars. We can’t afford not to do it!
It’s transaction tax and not a profit tax, so whatever the sales price, just compute your tax. Buying and selling.
Don’t worry, you can still buy your Apple stock, but if they’re successful, you’ll need to pay $2.93 for every share of Apple you buy or sell at today’s prices.
Oh, and don’t forget to include your shadow tax on your 401K, those mutual funds will be paying it and most have a 85% turnover every year in stock trades. So you’ll be paying that 1/2 cent on almost every dollar in your IRAs and 401Ks.
June 19, 2012 @ 9:04 AM
Is your question on a yearly
Is your question on a yearly basis – or lifetime basis.
$500 in tax is $100k in trades. I don’t trade that much a year. Maybe flu does. 🙂
June 19, 2012 @ 11:22 AM
UCGal wrote:Is your question
[quote=UCGal]Is your question on a yearly basis – or lifetime basis.
$500 in tax is $100k in trades. I don’t trade that much a year. Maybe flu does. :)[/quote]
I think my tax would be bigger by an order of magnitude or two.
This is not going to fly… Because it would kill the entire brokerage business.
Brokerages thrive on transaction trade. A lot of folks trade a stock and move in and out of a position. It’ like taxing money that isn’t even yours, because the tax is determined by share price, not by how much is made/loss.
Totally ridiculous, and probably written by a bunch of stupid politicians, mostly socialists I’m guessing.
June 19, 2012 @ 12:21 PM
I would do it.. but on one
I would do it.. but on one condition:
That the presidents, vice presidents, member of house of representatives and congress as well as all state and city governors and their congresses return all pay for the past 6 years, including payments to retirement accounts and health benefits (past 5 years and future). They must also surrender any federal and state pension benefits. Their pay from this point must start at the pay rate of their office in the year of 2000 and use the same health and retirement system (SS + self contributed 401k) that most of the rest of us use.
June 19, 2012 @ 12:31 PM
http://www.robinhoodtax.org/
http://www.robinhoodtax.org/
Bill Gates has endorsed it. That’s interesting to me.
The more I think about it – the more I think it won’t have a big impact on me. I follow a couch potato portfolio model – so not a lot of transactions.
http://www.bogleheads.org/wiki/Lazy_Portfolios
Yes – the underlying index funds have some trades… but since they’re index funds, they’re not trading a lot…
June 20, 2012 @ 8:24 AM
UCGal
[quote=UCGal]http://www.robinhoodtax.org/
Bill Gates has endorsed it. That’s interesting to me.
The more I think about it – the more I think it won’t have a big impact on me. I follow a couch potato portfolio model – so not a lot of transactions.
http://www.bogleheads.org/wiki/Lazy_Portfolios
Yes – the underlying index funds have some trades… but since they’re index funds, they’re not trading a lot…[/quote]
What about your CalPERs retirement funds?
Sweden did this in the 80-90s. The tax raised 3% of the projected revenues.
I turn about 25% of my portfolio, since the transaction would be 1% on the combine sell and replace buy, it would be an annoyance in my privately managed stuff.
My 401K through the company though would be another story, it would just be a 1% tax on my 401K, paid via increased expenses on the funds I own.
June 20, 2012 @ 8:38 AM
no_such_reality wrote:UCGal
[quote=no_such_reality][quote=UCGal]http://www.robinhoodtax.org/
Bill Gates has endorsed it. That’s interesting to me.
The more I think about it – the more I think it won’t have a big impact on me. I follow a couch potato portfolio model – so not a lot of transactions.
http://www.bogleheads.org/wiki/Lazy_Portfolios
Yes – the underlying index funds have some trades… but since they’re index funds, they’re not trading a lot…[/quote]
What about your CalPERs retirement funds?
Sweden did this in the 80-90s. The tax raised 3% of the projected revenues.
I turn about 25% of my portfolio, since the transaction would be 1% on the combine sell and replace buy, it would be an annoyance in my privately managed stuff.
My 401K through the company though would be another story, it would just be a 1% tax on my 401K, paid via increased expenses on the funds I own.[/quote]
I don’t have CalPERS retirement funds. I’m not a government worker, and except for a summer internship with the NOAA in college, and a part time gig at a junior college cafeteria, I’ve never been a government worker. (Both were super low wage, non-union, no bennies type jobs.)
You’re mistaking me with someone else.
June 20, 2012 @ 12:18 PM
I like the idea in theory.
I like the idea in theory. The stock market is nothing more than a gambling operation. At a sportsbook in Vegas, you effectively pay a tax to the house regardless if you win or lose. In the case of the stock market, the government is the house becuase they encourage/condone/enable this entire casino we call Wall St. Since the government is responsible for this, at least they should take a bigger cut.
July 2, 2012 @ 11:12 AM
I generally like this idea as
I generally like this idea as well. Whether it should be .5% or .25% or whatever is a political issue but I like the idea of a transaction tax.
It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.
It would also be a tax disproportionately paid by wealthy folks (who disproportionately hold or benefit from from the financial assets being traded).
If you trade very little, as I do, it would be a di minimis expense.
Hell, it might actually make folks start to think of stocks as pieces of businesses as opposed to pieces of paper to be traded. Truly bizarre notion, I know…
Generically, I like the idea. The devil, of course, is in the details.
July 2, 2012 @ 6:57 PM
davelj wrote:It would all but
[quote=davelj]It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.[/quote]
What defines a “stable” market anyway?
One without much liquidity is certainly not very stable, but “too much” liquidity is somehow “destabilizing?”
If a lot of people trade a little, that’s not destabilizing, but throw in a few people trading a lot, and that is somehow destabilizing?
At what point does the frequency of transactions cross the threshold into “destabilizing” territory? (based on what economic principle?)
Besides, what’s the goal the tax? To reduce liquidity and increase spreads? (It would do that.) How is that a good thing for anybody?
Or is the goal to reduce some vaguely-defined “destabilizing” phenomenon that HFT critics can never really identify?
BTW, there really aren’t that many firms doing HFT. Ending it (whatever that means) wouldn’t put many funds out of business.
July 2, 2012 @ 8:46 PM
How does HFT benefit the
How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.
July 3, 2012 @ 3:40 AM
deadzone wrote:How does HFT
[quote=deadzone]How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.[/quote]
I sense jealousy there…And the irony. I thought you work in the VC biz. And yet to cheer for the demise of the equity markets. Very interesting…..
July 3, 2012 @ 9:03 AM
flu wrote:deadzone wrote:How
[quote=flu][quote=deadzone]How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.[/quote]
I sense jealousy there…And the irony. I thought you work in the VC biz. And yet to cheer for the demise of the equity markets. Very interesting…..[/quote]
Not sure I follow your logic here. You didn’t answer my fundamental question, how does HFT benefit anybody? You are making the assumption that VC needs HFT? Liquidity in markets is one thing, but an unnatural hyper-liquidity (aka volatility) due to gamblers front running the markets and effectively skimming money (a la Office space scam)? Explain to me how that benefits anybody except the gamblers themselves and why should the government encourage and endorse this scam? A transaction tax makes a lot of sense and it should have minimal effect on the average retail buy and hold investor.
What am I jelous of, that rich politically tied Wall Street bankers are able to manipulate the system to effectively steal money and I can’t? Sorry, no jealousy just outraged that the government allows this behavior and you should be too.
July 3, 2012 @ 10:23 AM
deadzone wrote:Not sure I
[quote=deadzone]Not sure I follow your logic here. You didn’t answer my fundamental question, how does HFT benefit anybody?[/quote]
Do we really need to answer that question before something can be “allowed.” How does anything benefit anybody? You seem to be assuming that every business activity should be illegal by default until it is proven that it benefits somebody.
In exactly what court should we hold these trials? It would be a pretty busy court…
The answer is trivial: HFT traders benefit the people who trade with them. If they didn’t benefit, they wouldn’t take the other side of the trade.
Have you ever heard anybody complain that the counterparty to their trade was an HFT firm? What would be their complaint?
[quote]Liquidity in markets is one thing, but an unnatural hyper-liquidity (aka volatility) due to gamblers front running the markets and effectively skimming money (a la Office space scam)?[/quote]
Lots of subjectivity and bad assumptions packed into that one sentence.
“Unnatural?” What does that mean? “Hyper?” What is the threshold for “hyper?”
How does more liquidity become volatility? Try to explain that one with an example.
“Gamblers?” Please explain the difference between an trader and a gambler.
Skimming money? That’s simply impossible. If HFTs are responsible for most of the market volume, how can they be “skimming?” Is everybody skimming off of everybody else?
[quote]What am I jelous of, that rich politically tied Wall Street bankers are able to manipulate the system to effectively steal money and I can’t? Sorry, no jealousy just outraged that the government allows this behavior and you should be too.[/quote]
It’s pretty clear that, like most critics, you have no clue what HFT actually is. In fact, you don’t even know what trading actually is. You’re just repeating a bunch of myths and hysteria. The truth is actually very simple: HFT is just trading. There are no special rules that apply to them and there isn’t even any real definition of “high” frequency.
The barrier to entry into HFT is actually quite low. All of the market data and order feeds are available to anybody. They are expensive, and you need a certain amount of capital to trade effectively, but there is no special “club” that one needs to be in to trade electronically, “high frequency” or otherwise.
July 3, 2012 @ 10:55 AM
deadzone wrote:flu
[quote=deadzone][quote=flu][quote=deadzone]How does HFT benefit the markets or the society as a whole? All it does is line the pockets of Wall St. gamblers while adding unnatural volitility to the markets. If the government is going to endorse this kind of horseshit, then they should at least tax the hell out of it. The NYSE functioned fine for over 100 years without any type of computer trading. Before computers, most stocks actually had some tangible value. In fact you actually got a certificate of ownership of the company, what a crazy idea! Today, Apple is one of the larget cap companies and they don’t even pay a goddamn dividend. What a joke.[/quote]
I sense jealousy there…And the irony. I thought you work in the VC biz. And yet to cheer for the demise of the equity markets. Very interesting…..[/quote]
Not sure I follow your logic here. You didn’t answer my fundamental question, how does HFT benefit anybody? You are making the assumption that VC needs HFT? Liquidity in markets is one thing, but an unnatural hyper-liquidity (aka volatility) due to gamblers front running the markets and effectively skimming money (a la Office space scam)? Explain to me how that benefits anybody except the gamblers themselves and why should the government encourage and endorse this scam? A transaction tax makes a lot of sense and it should have minimal effect on the average retail buy and hold investor.
What am I jelous of, that rich politically tied Wall Street bankers are able to manipulate the system to effectively steal money and I can’t? Sorry, no jealousy just outraged that the government allows this behavior and you should be too.[/quote]
I was answering your statement that “wall street and stock market is one by gambling machine that should be shut down”, and yet the VC business is all about inflating a startup company with unrealistic financials, pump them up to oblivion, dump them on the the market to mom and pop idiot investors, so that VC + banks + IPO founders can steal a shitload of money from idiot mom and pop…Just like Zygna, Groupon, Facebook, and about every web 1.0 company that was imaginable.. So, yes why do you still work for VC if you rail against the system so much?
I think we should regulate the VC business. If some of the IPO’s end up in a fiasco, the bank underwriters and VC’s and founders should be on the hook for returning the losses. And while we’re at it, I think we should regulate the salary and bonuses of VC’s too. Makes as much sense to me as this stupid proposed law (which isn’t going to happen imho).
I’m not sure if you’re so adamant about how shitty the system is, why you would continue to be part of it…
I guess most people these days want their cake and eat it too.
July 3, 2012 @ 1:40 PM
flu wrote:I was answering
[quote=flu]I was answering your statement that “wall street and stock market is one by gambling machine that should be shut down”, and yet the VC business is all about inflating a startup company with unrealistic financials, pump them up to oblivion, dump them on the the market to mom and pop idiot investors, so that VC + banks + IPO founders can steal a shitload of money from idiot mom and pop…Just like Zygna, Groupon, Facebook, and about every web 1.0 company that was imaginable.. So, yes why do you still work for VC if you rail against the system so much?
I think we should regulate the VC business. If some of the IPO’s end up in a fiasco, the bank underwriters and VC’s and founders should be on the hook for returning the losses. And while we’re at it, I think we should regulate the salary and bonuses of VC’s too. Makes as much sense to me as this stupid proposed law (which isn’t going to happen imho).
I’m not sure if you’re so adamant about how shitty the system is, why you would continue to be part of it…
I guess most people these days want their cake and eat it too.[/quote]
FLU, you have me mistaken for somebody else, I am not in the VC business. Also, while I argue that Wall St. is nothing more than a gambling operation, I never claimed it should be shut down, just needs a log more regulation. HFT is just one aspect that probably should be controlled if not eliminated.
Harvey, there is no distinction between a gambler and trader. “Trader” is nothing more than a Wall St. euphonism for gambler. And in terms of HFT not having an underiable consequences, your are a fool if you belive this. THe average retail investor is exposed significantly to the stock market through 401K, pension, etc. When these trading firms manipulate the market with their pump and dump strageties, eventually it is the rest of us who get burned. It is not a fair playing field and you know it.
July 3, 2012 @ 8:41 AM
harvey wrote:
At what point
[quote=harvey]
At what point does the frequency of transactions cross the threshold into “destabilizing” territory? (based on what economic principle?)
[/quote]
Flash Crash is a good example of an unstable market.
[quote=flu]Great, so rather than giving middle class folks the ability to expand their income via passive investments, we’ll just tax them more so they physically have to work all the way until they are 65,70,75,80+.
[/quote]
Passive investors (buy and hold) won’t be impacted very much by this. It’s active investors – those that try to time the market, or day traders who will be taxed more.
Passive investors set up their asset allocation, rebalance once or twice a year and call it good.
July 3, 2012 @ 10:41 AM
UCGal wrote:
Passive
[quote=UCGal]
Passive investors set up their asset allocation, rebalance once or twice a year and call it good.[/quote]
Depends on which “passive” fund you are in, and if it really is passive.
July 3, 2012 @ 10:15 AM
harvey][quote=davelj wrote:It
[quote=harvey][quote=davelj]It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.[/quote]
[quote=harvey]
What defines a “stable” market anyway? [/quote]
How about we keep it simple and call it the standard deviation of periodic returns (pick your period), which has increased dramatically over the last decade as HFT has proliferated. If memory serves, less than 5% of all firms (the HFTs) account for ~75% of all equity trading volume in the US.
[quote=harvey]
One without much liquidity is certainly not very stable, but “too much” liquidity is somehow “destabilizing?”[/quote]
You’re under the mistaken impression that all liquidity is of equal value – it is demonstrably not. When markets are generally rising HFT is arguably value-neutral to the financial system. When it is falling, however, HFT is dangerous because the HFTs essentially exit the market at the same time (with attendant effects not unlike the fabled “portfolio insurance” trade that exacerbated the 1987 crash). As soon as someone can show me a single study showing that HFT has reduced overall volatility over any period of time I’m happy to reconsider my position here. I happen to think that a financial system in which the the prices of a large quantity of assets are being set by a marginal trader that has no opinion whatsoever on value is very unhealthy. And there’s a lot of high-level opinion that agrees with me here.
[quote=harvey]
If a lot of people trade a little, that’s not destabilizing, but throw in a few people trading a lot, and that is somehow destabilizing?[/quote]
Yes, if the “few people” exhibit the characteristics addressed above.
[quote=harvey]
At what point does the frequency of transactions cross the threshold into “destabilizing” territory? (based on what economic principle?)[/quote]
Admittedly hard to define. But so are a lot of other things that we still manage to address… it doesn’t mean the issue shouldn’t be addressed simply because it’s difficult. The economic principles at hand are that excessive volatility (1) increases the cost of equity capital, (2) makes capital planning more difficult, and (3) generally gives the public – for whom markets are supposed to serve some benefit – the notion that the markets are casinos.
[quote=harvey]
Besides, what’s the goal the tax? To reduce liquidity and increase spreads? (It would do that.) How is that a good thing for anybody?
Or is the goal to reduce some vaguely-defined “destabilizing” phenomenon that HFT critics can never really identify?[/quote]
If the liquidity is only actually available when the markets are rising… of how much actual use is it? The liquidity disappears and spreads increase at precisely the time most participants need it most… as markets decline. So, as explained previously, this is really a “false” liquidity – it’s not real.
[quote=harvey]
BTW, there really aren’t that many firms doing HFT. Ending it (whatever that means) wouldn’t put many funds out of business.[/quote]
As noted above, the number of HFT firms is not huge, but… they tend to employ a LOT of folks and are large relative to the average fund. I bet you’d see at least 5%-10% of hedge fund employees looking for work. And the lost commissions to the brokerage industry would be substantial but survivable.
July 3, 2012 @ 11:39 AM
davelj wrote:How about we
[quote=davelj]How about we keep it simple and call it [market stability] the standard deviation of periodic returns (pick your period)[/quote]
Correlation does not imply causation.
If you are attributing the crashes of 2000 and 2007 to HFT you are going to have to make a much stronger case.
Lots of things have changed in the markets in that period. Notably the rise of retail, on-line trading (e.g. E-Trade), integration of international markets, and many other things. There has been lots of big changes in the markets in the past decade or so, mostly due to information technology. Not to mention international terrorism, wars, and fundamental economic shifts in the US.
A common misconception about HFT firms is that they attempt to “move” the market. This claim is completely backwards. Market manipulation has been around forever, but none of it could be described as HFT. Any attempt to move a market would require taking on a position that is exposed to market risk – exactly the opposite of what HFT firms typically do.
Market volumes have increased steadily for the past 200 years. In the long term, there is zero correlation between volume and volatility. And there is no economic principle that suggests that there would be (in fact every credible economics model tells us that more liquidity means less volatility. There is plenty of empirical evidence to support this.)
[quote]You’re under the mistaken impression that all liquidity is of equal value – it is demonstrably not. When markets are generally rising HFT is arguably value-neutral to the financial system. When it is falling, however, HFT is dangerous because the HFTs essentially exit the market at the same time [/quote]
This is flat-out incorrect on many points (and self-contradictory as well.) You claim the liquidity that HFTs provide is “value neutral” when it’s there, but bad when it goes away? You can’t have it both ways.
Generally, HFTs don’t care which direction the market is moving (some trading firms do, but I wouldn’t characterize them as HFT.) The core HFT strategies are as market-makers – they always attempt to minimize market risk by remaining “balanced” long and short.
This is a common flawed argument against HFT: “Liquidity is is good, but liquidity provided by HFT is bad.”
Look at the order book for any instrument and tell me how to distinguish between the “good” and “bad” liquidity. All liquidity reduces spreads, all liquidity improves pricing for investors. There is simply no such thing as “bad” liquidity – there isn’t really any way to distinguish different “types” of liquidity. A bid is a bid, an offer is an offer. The markets don’t know or care who it comes from.
[quote](with attendant effects not unlike the fabled “portfolio insurance” trade that exacerbated the 1987 crash). As soon as someone can show me a single study showing that HFT has reduced overall volatility over any period of time I’m happy to reconsider my position here.[/quote]
First, we’d have to define HFT to even perform that study (i.e. How high is high?)
Second, I don’t see why the burden of proof should be as you position it. You’re the one claiming it’s bad, without providing any evidence of a problem.
What happened in 1987 was not the result of “high-frequency” trading, because (by any definition) HFT did not exist back then. It is a common mistake to confuse anything related to “computers” as HFT (and we are never going to eliminate computers from trading, that genie left the bottle a long time ago…)
[quote]I happen to think that a financial system in which the the prices of a large quantity of assets are being set by a marginal trader that has no opinion whatsoever on value is very unhealthy.
[/quote]
Another flawed assumption: HFTs care very much about value, in fact that’s all their algorithms really do: calculate value. They certainly apply much more rigorous analysis of value than the typical retail investor. Also, terms like “unhealthy” are not meaningful. There is no notion in economics or finance of a “healthy” system of valuation.
[quote]Admittedly hard to define. But so are a lot of other things that we still manage to address… it doesn’t mean the issue shouldn’t be addressed simply because it’s difficult.[/quote]
It’s not that it’s difficult, it’s horribly subjective. flu trades at least 10x more than most of us (perhaps 100x more.) Is he trading at “high-frequency?” Is he contributing to market volatility?
(Not picking on flu, in fact my point is that he should be free do trade as often as he chooses.)
[quote]The economic principles at hand are that excessive volatility (1) increases the cost of equity capital, (2) makes capital planning more difficult, and (3) generally gives the public – for whom markets are supposed to serve some benefit – the notion that the markets are casinos.[/quote]
Sorry, but that doesn’t even make sense. First, you haven’t proved that HFT contributes to more volatility. Equity capital is priced by the market. Why is it “higher” if there more volatility? Volatility means up and down, right?
And people have considered the stock market to be “gambling” for close to 100 years.
[quote]If the liquidity is only actually available when the markets are rising… of how much actual use is it? The liquidity disappears and spreads increase at precisely the time most participants need it most… as markets decline. So, as explained previously, this is really a “false” liquidity – it’s not real.[/quote]
Even if this claim were true, I don’t see the problem. If HFTs exit the market, and liquidity returns to “normal” than what has been lost? Take away HFT and there would be less liquidity all the time. How is that better?
If the issue is participants leaving the market when it is falling, then a tax would not solve that problem, since the tax offers no incentive to stay in the market. The issue of liquidity leaving the markets has been around long before HFT, and has been (partially) addressed by regulations like the downtick-rule and market-maker requirements.
[quote]As noted above, the number of HFT firms is not huge, but… they tend to employ a LOT of folks […][/quote]
Not sure where you are getting that figure. They actually tend to be small relative to other “Wall Street” type firms (remember it’s computers doing all the work, not people.) Plus, because they rely heavily on key intellectual property (their trading strategies) they tend to be very secretive, which also keeps the size small.
I really don’t care what happens with HFT. It’s been good to me, but I’m out of that business aside from some occasional consulting. Very few people, even those in the financial industry, really understand what it is, and most opinions I’ve heard are based far more more on myth than facts. Most of the critics – including some journalists working for big newspapers – don’t really even understand the basics of trading.
The perception that HFT is somehow a “dirty” business is somewhat amusing to me. Since it’s based on math and algorithms, there’s really no opportunity for backroom deals or cronyism or any of the other shenanigans that occur in just about every other business. The computers and calculations don’t care who you know, or which politician’s palm you grease. The decisions are completely dominated by objective data.
But people will always be uncomfortable with things they don’t understand.
July 3, 2012 @ 12:22 PM
Many of my opinions on HFT
Many of my opinions on HFT are formed by a friend of mine who works at GETCO, with whom I’m sure you’re familiar if you work in the industry. He does not hold his own firm in particularly high regard, so he’s likely leaving soon. But I digress.
[FYI, regarding employment, GETCO employs over 500 people according to my friend, which would place them among the very largest funds in the world in terms of employees. Apparently it takes a lot of humans to operate the robots.]
Rather than wasting my time (and yours) going back and forth on this issue, we’ll have to agree to disagree.
While you raise some legitimate points above, you also mischaracterize a few of my points (e.g., I specifically pointed out that the ’87 crash was a result of PI, not HFT, as you claim; I didn’t attribute the crashes of ’00 or ’07 to HFT; I could go on). Also, frankly, if you don’t understand the relationship between equity prices and the cost of capital (which is directly impacted by market volatility – it’s an input in the calculation, after all)… then we’ll probably never see eye-to-eye on this.
In any case, we’ll see what happens. Personally, I don’t care greatly how it all turns out. My preference would be to see a financial transaction tax, as I’ve noted. But, as I’m not a trader… it will have minimal impact on me either way.
July 3, 2012 @ 1:10 PM
For those interested in the
For those interested in the most recent academic study published on HFT (this can be downloaded for free):
A Multiscale Model of High-Frequency Trading
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2046199
[Warning: Despite being a math minor as an undergad, some of the maths in this paper would take me longer to follow than I’m willing to put into it. Yes, I’m lazy that way.]
Abstract (note the last sentence):
We propose and study a stylization of high frequency trading (HFT). Our interest is an order book which consists of orders from slow liquidity traders and orders from high-frequency traders. We would like to frame a model which is amenable to the (seemingly natural) mathematical toolkit of separation of scales and which can be used to address some of the larger issues involved in HFT.
The main issue to which we address our model is volatility. An important question is how volatility is affected by HFT. In our stylized model, we show how HFT increases volatility, and can quantify this effect as a function of the parameters in our model and the separation of scales.
************************
Disclaimer: Clearly this isn’t the last word on the subject. And the assumptions and constraints that may diverge from the real world are piled up high. But… it’s certainly the most recent word duly judged by a highly sophisticated jury.
July 3, 2012 @ 1:44 PM
davelj wrote:Many of my
[quote=davelj]Many of my opinions on HFT are formed by a friend of mine who works at GETCO, with whom I’m sure you’re familiar if you work in the industry. He does not hold his own firm in particularly high regard, so he’s likely leaving soon.[/quote]
There was a lot I didn’t like about it myself, and I probably share many opinions with your friend. At the point I was most burnt-out on the whole business, I actually tried to find a good argument against HFT as I would have been happy to see the whole industry go away. But I never did find any criticism that held up to scrutiny.
I’m not going to argue whether GETCO is large or small because I don’t know what we are using as a basis of comparison, but I don’t see how taxing 500 highly-skilled people out of job could be a good thing on it’s own. There would have to be some substantial benefit to society to offset these impacts.
If we step back and look at the the criticisms of HFT, they are really not specific to the relative “frequency” of the trading, and always turn out to be separate issues altogether:
– Mistrust of computers in decision-making processes (no way to reverse that trend…)
– Misunderstandings about the benefits of financial markets and liquidity in general (anybody who characterizes trading simply “gambling” just doesn’t get it and is never going to like anything about HFT or any other type of trading for that matter.)
You are correct that I missed the point about cost of capital calculations. I’ve never done that in any professional capacity and I pretty much forgot about those formulas. (I didn’t think that formula was really used with actual market beta outside the finance 101 textbooks, but I could be completely wrong.) Even so, any relationship between HFT and cost of capital has got to be pretty dubious at best.
The general argument of “it won’t impact me” is easy, but problematic. There are lots of potential taxes out there the wouldn’t impact most of us directly. Of course everybody wants the other guy to pay.
July 3, 2012 @ 3:19 AM
davelj wrote:I generally like
[quote=davelj]I generally like this idea as well. Whether it should be .5% or .25% or whatever is a political issue but I like the idea of a transaction tax.
It would all but put an end to high-frequency trading, which I think is a good thing, as I think HFT is a destabilizing activity (despite what its proponents argue). It would also thin out the herds in the brokerage industry and put a LOT of hedge funds out of business, which would not be a bad thing.
It would also be a tax disproportionately paid by wealthy folks (who disproportionately hold or benefit from from the financial assets being traded).
If you trade very little, as I do, it would be a di minimis expense.
Hell, it might actually make folks start to think of stocks as pieces of businesses as opposed to pieces of paper to be traded. Truly bizarre notion, I know…
Generically, I like the idea. The devil, of course, is in the details.[/quote]
Agree very much with this.
June 19, 2012 @ 1:04 PM
So sick and tired about
So sick and tired about people bitching about their financial plight…
July 3, 2012 @ 3:38 AM
Great, so rather than giving
Great, so rather than giving middle class folks the ability to expand their income via passive investments, we’ll just tax them more so they physically have to work all the way until they are 65,70,75,80+.
Meanwhile corporations/hedge funds will probably be exempt from this rule. Just so we can end up paying for federal/state/local expenses that completely unreasonable in this economy, like public pensions and RE bailouts…
Makes sense to me…Actually, no it doesn’t. It makes me pretty sick frankly. You know what I really hate about a lot of people these days? They want to have their cake and eat it too. They want other people to pay all the new increased taxes, but at the say time they expect to continue reaping all the benefits they have (as unreasonable as they are) while not paying any of the new taxes.
Well. I know what I’m going to be doing with the 3.8% passive income surcharge I’ll be levied and the 0.9% surcharge from the Healthcare spending bill. I’m going to do my darnest to pass this cost directly on to the tenant. Because while I’m not charging the most I can on my rentals, I be making an adjustment to do just that, and will have no problem finding tenants still. And I’m going to find the most aggressive accoutants to report as much into my rental expenses as possible….So the folks that end up getting screwed isn’t completely me…but rather…yup the ones in a lesser strong financial position who are trying to save and buy a home for the first time….
July 3, 2012 @ 10:26 AM
flu wrote:Great, so rather
[quote=flu]Great, so rather than giving middle class folks the ability to expand their income via passive investments, we’ll just tax them more so they physically have to work all the way until they are 65,70,75,80+. [/quote]
Most “middle-class” folks don’t own stocks directly (or don’t own a lot if they own them at all). And if they do, they’re probably better off “investing” as opposed to “trading.” (I know some middle class folks who traded in the late-90s/early-00s… it didn’t turn out so well despite the absence of a transaction tax.) One wistfully wonders how we managed to survive as a society prior to the rise of the “trading culture.”
[quote=flu]
Meanwhile corporations/hedge funds will probably be exempt from this rule. Just so we can end up paying for federal/state/local expenses that completely unreasonable in this economy, like public pensions and RE bailouts…[/quote]
There’s no way that corporations or hedge funds would be exempt from the rule. The rule would, in fact, target hedge funds specifically.