Holy crap do we need a financial transaction tax

[Dissipate]

HFT is like bitcoin mining, complete waste of resources and no advancement for humanity 😀

Bitcoin mining brings value to both the miners and the people sending Bitcoin transactions. Not sure about 'humanity'.

 

[fskimospy]

How is a small, negligible tax on a transaction going to affect dangerous activity? Those costs are just going to be passed on to the investor as a cost of doing business. Plus, the vast majority of stock transactions are from mutual funds, 401K's and pensions. The fees will be assessed in those funds and most cases won't be known to the plan owner until many years later. Maybe I'm naive, but I'm not seeing how a tax is going to effect risk or "dangerous activity".

No to all of this.

Maybe it will help if I explain it better. High frequency trading depends on making a tiny bit of money on thousands or millions of transactions. Old style trading is more on making larger sums of money on just a few transactions.

Lets take an example. Say the fee for a transaction is $.01. Say the old trader makes $1,000 on a single trade. He then pays $.01 in taxes on that. His net profit is then $9,999.99. Right? Say a high frequency trading scheme takes 100,000 trades to make $1,000. The taxes on that will equal $1,000, making his profit 0. That makes high frequency trading of that sort unprofitable, so you don't do it. There's no passing on costs, because it's impossible to make money on so you don't do it at all.

 

[Matt1970]

Are you joking? First of all, evidence shows that increases in cigarette taxes have a dramatic effect in decreasing smoking rates.

Secondly, the point of HFT is to make money through tons of small transactions. It is in fact quite simple to make lots of small transactions unprofitable. If you can't make money doing it, nobody will do it.

They just switched products.

The study used data from the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau to calculate consumption for all forms of smoked tobacco products and to estimate the per unit use of each type. According to the report, total consumption of all smoked tobacco products – which includes cigarettes, roll-your-own tobacco, pipe tobacco and cigars – declined by 27.5 percent between 2000 and 2011.

Yet despite the overall decline, the consumption of non-cigarette smoked tobacco products increased by 123 percent

 

[BoberFett]

Also, I just want to note that Democrats who love to talk about how increasing the taxes on capital gains won't affect investment activity by the wealthy because they'll still invest just as much, they'll simply be taxed more. But somehow these same people believe that taxes in other areas such as smoking or financial transactions can actually change behavior. It's an amusing bit of dissonance.

 

[fskimospy]

Also, I just want to note that Democrats who love to talk about how increasing the taxes on capital gains won't affect investment activity by the wealthy because they'll still invest just as much, they'll simply be taxed more. But somehow these same people believe that taxes in other areas such as smoking or financial transactions can actually change behavior. It's an amusing bit of dissonance.

Who argued this? Can you provide a link? I have seen many occasions where liberals correctly shot down conservative arguments that cuts in capital gains taxes would necessarily lead to increases in government revenues, but I don't recall an argument that people would invest exactly the same as before. People will invest wherever they can get the best return for their money.

That being said, changes in taxation for activities is one of the most reliable ways of altering behavior that we know of.

 

[BoomerD]

ALL income, regardless of source should be taxed at the same rate.

Why should the rich folks like Romney, who get a significant portion of their income from investments, be taxed at a lower rate than the working class schmuck who digs ditches to feed his family?

(yes, I know, tax rate does not equal actual tax paid)

 

[fskimospy]

ALL income, regardless of source should be taxed at the same rate.

Why should the rich folks like Romney, who get a significant portion of their income from investments, be taxed at a lower rate than the working class schmuck who digs ditches to feed his family?

(yes, I know, tax rate does not equal actual tax paid)

That's not a good idea though, investment income is inherently more affected by inflation than wages so there needs to be a recognition of that.

 

[Fern]

It's not readily clear to me why HFT is a bad or dangerous thing.

Fern

 

[BoomerD]

That's not a good idea though, investment income is inherently more affected by inflation than wages so there needs to be a recognition of that.

How so? Income is income. If the working-class slug has to pay taxes for the money he makes, the investor should pay the same taxes on the money they make. Just because one makes the money with the sweat from his brow and the other makes the money with his money...doesn't make the end result money worth more or less.

 

[QuantumPion]

You guys have no idea what the purpose of HFT is or even bother to care to find out before criticizing it.

The purpose of HFT is to squeeze every last bit of liquidity out of the market as possible. As long as a weird problems aren't occurring, it is beneficial for everyone (except for those of you with no job and no savings). If there are problems occurring, like what happened last week, those problems can be addressed and fixed. Those of you calling for a tax don't give a rats ass about the stock market, you just want an excuse to put a monkey wrench in the gears of capitalism.

 

[fskimospy]

It's not readily clear to me why HFT is a bad or dangerous thing.

Fern

Seriously? Did you read the article?

 

[momeNt]

It's not readily clear to me why HFT is a bad or dangerous thing.

Fern

OP said tax it (effectively getting rid of it) just because we don't know what it can do... which is bad reasoning. Some HFT algos are designed to manipulate the market and actually throw off price discovery, zerohedge.com has covered it since 2009 with regards to the quote stuffing which causes spikes in either direction which cause chain selloffs or buys based on bad information.

 

[modestninja]

OP said tax it (effectively getting rid of it) just because we don't know what it can do... which is bad reasoning. Some HFT algos are designed to manipulate the market and actually throw off price discovery, zerohedge.com has covered it since 2009 with regards to the quote stuffing which causes spikes in either direction which cause chain selloffs or buys based on bad information.

I agree that HTF as it stands now is a problem, but I'm going to side with momeNt here in saying that HFT in and of itself isn't a bad thing. It helps tighten bid/ask spreads and can make the market assign capital more effectively. That being said, like momeNt says there are algos that are designed to manipulate the market. The trick is to get rid of the bad algos (which cause these market distortions) while not crippling the good algos (which more effectively assign capital but don't distort the market).

Maybe something like a minimum order length (a fraction of a second would do) and/or a cancel order fee (again pennies would do) and/or a minimum active quote latency.

 

[Darwin333]

This chart is absolutely terrifying:
http://blogs.reuters.com/felix-salmon/2012/08/06/chart-of-the-day-hft-edition/

The result by late 2011 is basically chaos. There is no way anyone is able to predict the results of all these microtransaction algorithms hitting up against one another. This seems to have a lot of potential for catastrophic consequences going forward.

You would think that we need a lot more than that if you understood exactly what it was they were doing with all those non-executed bids and offers (hint: stealing your money)

 

[Franz316]

Pretty much. They could get rid of it for all i care. It does more harm then good in its current state.

The stock market is so disjointed from reality that I think people are beginning to question how the DOW can be so high yet the rest of the economy is in the tank. It is pumped up by fast trading software programs and the hopes that the FED is going to print some more money. If it ever does recouple with reality then a lot of money is going to be lost, too bad for them.

 

[Jaskalas]

So an income tax wouldn't work for this, as the goal is to slow down HFT.

Can't say I've any direct opposition to taxing it, is that the ideal solution? Could just ban it...

 

[Darwin333]

It's not readily clear to me why HFT is a bad or dangerous thing.

Fern

This sums it up rather well. BTW, it is already illegal (or against one of the 3 letter agencies rules or something) to place an order or offer a stock that you have no intention on fulfilling at the time that you placed the order.

Let's say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40.
But the market at this particular moment in time is at $26.10, or thirty cents lower.
So the computers, having detected via their "flash orders" (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.
Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."
Nonsense; there was no "real seller" at any of these prices! This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!
With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "raped" at the full limit price! You got screwed, as the fill price is in fact 30 cents a share away from where the market actually is.
A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." The truth is that you got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.

 

[modestninja]

The stock market is so disjointed from reality that I think people are beginning to question how the DOW can be so high yet the rest of the economy is in the tank. It is pumped up by fast trading software programs and the hopes that the FED is going to print some more money. If it ever does recouple with reality then a lot of money is going to be lost, too bad for them.

The DOW is not that disjointed from reality. Have you seen the kind of profits that companies like Apple are pulling in and the amount of cash that they're sitting on?

Here's a graph of profits vs. the S&P that I pulled from the web. As you can see there is a pretty significant correlation between the two despite HFT. The only significant aberration is during the tech bubble. Unfortunately I only had a couple of minutes to look but if you're interested you could probably get the updated data and make sure it stays with the general trend.

 

[Darwin333]

How is a small, negligible tax on a transaction going to affect dangerous activity? Those costs are just going to be passed on to the investor as a cost of doing business. Plus, the vast majority of stock transactions are from mutual funds, 401K's and pensions. The fees will be assessed in those funds and most cases won't be known to the plan owner until many years later. Maybe I'm naive, but I'm not seeing how a tax is going to effect risk or "dangerous activity".

They vast majority of bids and offers on any given day are NOT from the entities you listed, not even remotely sorta kinda close. The vast majority (at times 90% in an entire day) are from HFT computers ran by megabanks that have enough money and power to get a server collocated with the exchange to cut down the latency and scam all of the investors you listed out of a couple of pennies per transaction they make.

 

[Fern]

Seriously? Did you read the article?

Yes. I read the link you provided in your 1st post.

Fern

 

[OneOfTheseDays]

We really need to put an end to this entire industry that's dedicated to creating wealth out of thin air. Our society as a whole needs to be reevaluated, and IMHO the financial services industry needs to be gutted heavily. They don't provide anywhere near the level of service to society that their fat paychecks would otherwise indicate.

 

[Fern]

This sums it up rather well. BTW, it is already illegal (or against one of the 3 letter agencies rules or something) to place an order or offer a stock that you have no intention on fulfilling at the time that you placed the order.

Interesting info in the quoted portion of your post.

I understand what they are saying, but it seems to me to be fom only one of two perspectives. Wouldn't the firm on the 'buy' side be doing the same thing? If so, seems to me they would be a 'averaging effect'.

[Edit: It now occurs to me there are 3 perspectives: (1) Those probing for highest buy amount, (2) those probing for lowest sales amount, and (3) those probing for large delta between buy/sale to jump in and arbitrage for profit.)

It also seems to me that what we're seeing is in essence better and more accurate info at a much faster pace. Clearly though, those trading in the market without these 'tools' (super computers and algos) are severely disadvantaged. But that's always been the case; they've never enjoyed the knowledge and expertise of the larger traders/investors etc. They've never had the access to the more detailed and timely financial knowledge the 'pros' do.

Fern

 

[DucatiMonster696]

How so? Income is income. If the working-class slug has to pay taxes for the money he makes, the investor should pay the same taxes on the money they make. Just because one makes the money with the sweat from his brow and the other makes the money with his money...doesn't make the end result money worth more or less.

The "working-class slug" doesn't have much risk involved in his/her wages compared to a investor. Their wages are pretty much set in stone by their employer vs someone who invests thousands, or millions or even billions of dollars into a risky real estate deal or fledgling hi-tech company, etc only to have it go bust and they end up going broke. If we don't acknowledge the differences in risk then we will just kill investments in new ideas and stop the flow of investors money circulating through the economy.

 

[Hugo Drax]

More bitching and whining about HFT. Like when people were bitching and whining about the Automobile during the cusp of its arrival, or the Computer etc..

If you cant evolve then you die like the dinosaur.

Also I notice a few folks here making up "Scenarios" trying to state it as a factual event. As if it was some kind of proof.

 

[Ronstang]

why again do we need a tax? And how will that decrease risk exactly? BTW, SEC already charges a fee for a transaction. So, there's already a tax.

That was exactly my thought but you have to understand the mindset of the OP. He looks for any justification for increasing existing taxes or instituting a new one.