Elsewhere I’ve long pushed the idea of a financial transactions fee to rebalance the playing field in securities markets, so they will no longer lean so hard in favor of giant Wall Street brokerage houses, now running a scandalous scam called commission-free High Frequency Trading (HFT). Extremely modest in scale, the transaction fee would not even slightly inconvenience normal traders, like you and me. But it could prevent disastrous bubbles and other calamities.
Indeed, recent months have shown dramatic moves toward this metric of sanity. Eleven Eurozone members, including France and Germany, will use it to discourage speculative trading. Also known as a Tobin tax after the economist who originally came up with it 40 years ago – the fee will charge 0.1% of any trade in shares or bonds, and 0.01% of any financial derivative contract.
Now, following the Europeans’ lead, Senator Tom Harkin of Iowa and Rep. Peter DeFazip of Oregon have introduced a bill to institute a U.S. version of the transaction fee. By raw extrapolation, this zero-point-zero-three-percent (o.03%) fee could raise a whopping deficit-curbing $352 BILLION dollars in ten years, while helping capital markets to settle down, avoid bubbles and computer runaway-meltdowns, while returning to both individuals and regular companies a fighting chance to participate in capital markets on an equal footing.
Question: at three cents for every $100 traded, who among us would notice? Only those who pour billions each year into shaving off microseconds in computerized systems that sense when any of us are about to make a buy or sell order and pounce before we can act. And pounce hundreds or thousands of times per second. These predatory HFT trades now constitute the vast majority of transactions on today’s exchanges. How did that happen?
Only the fact that they are participants in a cartel — “seated members” of exchanges like the the NYSE or NASDAQ — lets them get away with an activity that none of the rest of us could engage in. Even a savvy billionaire would soon be wiped out by commissions if he or she tried to do HFT from outside the cartel — a blatant case of insider manipulation and restraint of fair competition that ought rightfully to be broken up under anti-trust laws. (In this computerized day and age, why not have a hundred times as many “seats” or exchange members competing with each other? Indeed, though it be blasphemy, let me ask: why have “seats” at all?)
Have a look at the vast amounts of data now handled by huge, fantastically well-funded HFT systems (they recently laid their own fiber cable across the Atlantic, to shave a few more milliseconds), making NASA’s space probe data crunching look pale in comparison.
== Why you should want – and help – this to happen ==
A couple of points: First – all right – we would not actually get $320 billion; because the fee would succeed in its goal of reducing volatility. Still, lots of income would come in from those who caused the Near Depression and seem bent on provoking another. At minimum, the new fee would pay all costs of running the SEC and other agencies charged with maintaining transparency and accountability in Wall Street, removing those burdens from the taxpayers. It could also serve as an alternative funding source for the bond rating agencies, like Standard & Poors, freeing them from the present incestuous conflict of interest — rating the bonds of those who pay their wages.
Note that under Harkin’s bill, initial stock offerings – the “best” and most truly useful trades – would be exempt, along with other exceptions, like the first hundred trades you and I make any year, to ensure that HFT speculation will carry the main load.
If you talk to a “quant” — one of the high-IQ dopes who have done the boffin work for High Frequency Trading — you will hear them howl that HFT serves a valuable function toward “efficiently finding correct prices” and eliminating the differential between perceived value of buyers and sellers. They actually believe this promotes market health, despite the sickness that has pervaded the capital markets ever since they took us down this road. Even though it can be proved, under basic thermodynamic and biological principles, that this incantatory premise of theirs is completely insane, a self-hypnosis mantra that’s diametrically opposite to true. (Engines and organisms and markets operate healthfully upon gradients, which HFT happily and eagerly and parasitically eliminate.) They need to go back to math and physics, where nature corrects delusion.
As the author of The Transparent Society, I like the way a Tobin fee would create a continuing open-audit of the giant banks and brokerage houses, a side benefit, letting us all see what they are doing. (Do you trust them, after decades of cheating and outrageously stupid behavior?)
Of course, wearing my other hat as a science fiction author, I have my own “terminator” reasons for wanting to see the Tobin enacted. But you’ll have to follow your curiosity to this older article: A Transaction Fee might save Capital Markets and protect us from the Terminator… in order to find wry/scary amusement in a “far-fetched” danger that could be very real. One that only a sci fi author would think of! (That too is where you’ll find the “thermodynamics” arguments explained.)
Now it’s your turn. Please, despite its dry tech-speak, this reform really, really matters. If you can get up out of Facebook torpor enough to take the effort, write to your congress-critters and news-sites in support of Sen. Harkin and the Tobin Fee proposal! You should have all the email addresses already on hand and ready for messages like this one, right? If you don’t, pause now to create a little file containing your standard opening and closing, plus the email addresses of both senators, your representative, the president and favorite media. (Check the website: Find Your Representative. ) A little work this time… will empower you to speak up easy and quick, the next time some issue raises your ire.
Or the next time I ask it of you! 😉
== Political-economic Miscellany ==
Compiled at last: Brin articles about emergency readiness, civil defense, citizen resilience — how to make yourself – and civilization – more robust against the dangers and inevitable calamities that will strike us in this century.
Watch this excerpt from “Chasing Ice” – an amazing documentary of time-lapse photographers tracking the retreat of the world’s glaciers. Watch a mass the size of Manhattan break off Greenland and flip with staggering violence! Then watch the whole film. Take your crazy uncles along. The images are convincing.
A secretive funding organization in the United States that guarantees anonymity for its billionaire donors has emerged as a major operator in the climate “counter movement” to undermine the science of global warming, The Donors Trust, along with its sister group Donors Capital Fund, based in Alexandria, Virginia, is funneling millions of dollars into the effort to cast doubt on climate change without revealing the identities of its wealthy backers or that they have links to the fossil fuel industry. However, an audit trail reveals that Donors is being indirectly supported by the American billionaire Charles Koch who, with his brother David, jointly owns a majority stake in Koch Industries, a large oil, gas and chemicals conglomerate based in Kansas. Millions of dollars has been paid to Donors through a third-party organisation, called the Knowledge and Progress Fund, with is operated by the Koch family but does not advertise its Koch connections.
Now some context. A cool interactive site lets you sift and explore the world’s top billionaires and sort them by self-made vs inherited or by gender or nationality.
David Ignatius on why America and Europe are seeing good reasons to start cheering up. That is… if we keep confidently investing in our strengths.
The rise of volunteerism in Russia is seen by folks-like-us as a hopeful sign. of an optimistic, can-do culture beginning to ferment in a land long dominated by dour cynicism. Alas, the older tradition is fighting back, as the powers-that-be have been clamping down hard on nonprofits and volunteer groups, even those with no political agenda at all.
Speaking of which… While the global nature of cyber-crime means the criminals can be anywhere, we tend to think of Eastern Europe and Russia as the hotbed of criminal activity. Trend Micro believes criminals will increasingly shift their operations over to Africa in 2013.
Now and then we see proposals to remove tax exemption from churches. A measure came close to passing in Colorado some years ago. And now comes this We The People petition to the White House. I’ve long held that such proposals should offer a “floor” exemption. Say $100 per parishioner and ten sq ft per member, also the first $40K of pastor wages, all of it baseline tax-free. This would safeguard all poor churches and clearly distinguish basic from lavish. True charitable work would also be exempt. It would also make the measure one that might actually pass, someday, while a complete removal of tax-exemption won’t.
The blanket exemption has been justified by the expression “the power to tax is the power to destroy.” But nobody is out to destroy churches and the tax-free floor that I propose would end such talk and would remove that justification, allowing us to say: “you use our roads and cops and defense, same as anybody. Please help pay for them.”
David Brin
TO THE BRINK 
I quite like bitcoin’s transaction fee- usually around 0.01cent. Not bad eh?
Brinn, I’m a huge fan of your works, but I don’t believe you are right here.
First, looking at SPY, you can see that the average bid-ask spread is just a penny, meaning that a market order has a transaction cost of 0.66 basis points. A 3 basis point transaction tax would represent a 454.55% tax over the current cost of liquidity. Imagine selling apples for $1 and being charged with a $4.5 tax!
In fact, you don’t even have to pay the bid-ask spread. Retail brokers like InteractiveBrokers or OptionsXpress allow you to submit Market-on-Close orders. All such orders are aggregated and held until the closing time, at which the exchange hold the Closing Auction. The exchange builds up a supply and demand curve and finds the price point at which they cross, then all on-close orders execute at that price. Thus as a retail trader you never need to interact with HFT at all.
There are many legitimate reasons why someone would need to trade a stock back and forth besides “speculation” (which isn’t even evil). For just one example, option sellers need to delta-hedge their positions. Since an option is non-linear to the asset price, if you buy a call option on a stock, the seller needs to continuously neutralize their exposure to the stock as it fluctuates. Transaction costs are friction that prevents the system from working properly and should be minimized as much as possible.
If your goal is to prevent traders with access to high-speed infrastructure from having an advantage, eliminate the penny spread rule, which is basically a price floor on the cost of liquidity. See this Hacker News comment by kylebrown:
“It’s a little known fact about HFT that the reason speed is the primary advantage, is because the exchanges don’t allow orders at prices which are fractions of a cent, and its first-come first-serve at each price point. The minimum spread permitted on the NYSE was 1/16 of a dollar (6.25 cents) until 2001, when the SEC forced all exchanges to the “decimal system”. So now the minimum permitted spread is one penny.
If the exchange allowed orders at prices which are fractions of a penny, then algorithmic trading systems would have to compete on price as well speed. But it would also narrow the spreads, which would mean less profit for the “market makers”.”
http://news.ycombinator.com/item?id=5198408
Have you ever watched 2 karate or judo fighters spar? They dance around make thrusts and pushes for a short period and then one or the other will attempt an attack, and so it goes. What they do in the initial period is test the various responses they each make to the other and how it affects their ability to lose to an attack. This also involves many feints, and in time the experienced person learns enough to defeat the other.
In the same manner, these HFT trades allow the machines algorithms to evaluate the system they are sparring with, and then the attack that has found a weakness, some small delay in timing that allows the attacker to force a market opportunity (price spread) and to execute a profitable trade.
Repeated at high speed it becomes a method whereby those withe lastets links and quants to drain $$ steadily from the market. Similarly, any market leak can be detected and acted on with blinding speed. Here is one example.
http://www.nanex.net/aqck2/4090.html
Adding a transaction fee to all these fake and cancelled trades would act as a form of friction and reduce or even kill off the practice. It in fact must be killed off, you and I have no hope in the face of it.
D.,
Unfortunately reading Zero Hedge and HuffPost is not an adequate tutorial about what actuay happens in the markets. Try Trading and Exchanges: Market Microstructure for Practitioners by Harris.
Then, suggest that you actually go talk to some of the exchanges, ECNs, and HFTs. It’ll be an eye-opener.
There is a legitimate debate to be had, but you’re just parroting the sensationalistic and popular side of the story being pimped by the folks whose “business model” (and livelihoods, which were based on even more questionable, albeit slower, market machinations, ie collaboration and induced inefficiency) HFT ate. Not exactly unbiased – or accurate.
Best,
j (fan, former hft dude, always a geek)
David, be really careful what you ask for.
Any time you add levies such as this, somewhere along the line, along the margin, the barrier-to-entry for a particular class of investor will rise. At that point, those marginal investors will be priced out of the market in favor of smaller players AND LARGER players who now gain by having a little less competition in their space. Levies like this provide a further distance between the rich and poor, just the opposite of what you are seeking.
You can see the same phenomenon at work in, for instance, the gold mining industry where the cost of environmental compliance has priced the small- and medium-sized players completely out of the market in favor of the mega-multinationals like the South Africans.
Thanks for the article. The name of the Oregon Rep is Peter DeFazio, not DeFazip.
This is an excellent response via Hacker News:
http://news.ycombinator.com/item?id=5199127
It is also worth noting: it is legitimate to consider the HFT fellows as *part of the market infrastructure* rather than participants in the market themselves. Re the “you and I have no hope” comment by Mr. Jackson, ordinary human beings shouldn’t be playing day trader anyway; you *will* compete with HFTs and sophisticated professionals (as well as lots of other types that have questionable advantages) and you *will* lose. But the efficiencies induced do not demonstrably negatively impact *investment* strategies.
I for one, do not want a walled garden, where I can peck at the crumbs left by the giants. What is needed is a way to cripple this HST. One way would be through a delay of 1/2 a second, or a tax as Brin says. I would not feel this little tax, but to the HST it would curb them
Why do you feel that a *service* which helps insure liquidity — i.e., that you can buy and sell your *investments* whenever you like — and provides monotonic price continuity, needs to be “curbed?” Note that the parties whose traditional, human mechanisms provided these types of services — designated market makers, brokers dealing on own account, etc. — all had a *much* greater profit margin than HFTs. (By the way, it’s HFT, not HST.) Where do you think *that* profit came from?
Now, as I said initially, there is a legitimate debate to be had. Designated market makers, for one, had some obligations (to a point) to stand and take it in adverse conditions. HFTs do not have the same obligations. However neither delays of market data (seriously, you actually think that would benefit anyone but arbitrageurs? That would create *more* opportunity for such things, not less) nor transaction fees are the right way to more responsibly integrate the *service* that HFT provides (very, very efficiently — to the retail customer’s benefit) into the overall market structure.
The problem here is that everyone with an “answer” to this problem — doesn’t understand the problem.
Liquidity as you describe it resembles a feeding where kittens and tigers are tossed haunches of beef. Will a tiger take note that a kitten is hanging on to the haunch it has taken? In effect the large volume of trades and cancellations at high speeds blitzez the market and those with computers that can cope draw money from the market, and the others lose.
In effect, markets and the liquidity needed will work only if there is a basic equivalence among the buyers and sellers.
It is like the Gordian Knot, the only answer is the break the system and replace it with a better one. Those in it now draw $$ from it, and the rest of the world loses $$
nym,
D. probably doesn’t like bitcoin, probably gets frothy about it; see, it’s not centralized. Not planned enough, not controllable enough. We have to leave such matters to the sages of bureaucracy, you see. The bigger and more centralized, the better.
David Brin here:
Hello friends. A confession. I cross-post here at WordPress and there’s seldom much comment traffic here. The real comment-community — or blogmunity — for Contrary Brin is over at the blogger version – http://davidbrin.blogspot.com/ And an excellent, very high (mental) caliber community it is!
Now details:
“Yong” hello and thanks. But you are mistaking cause and effect. The speads are so low because HFT is erasing spreads by nibbling them to death, denying real buyers and sellers any chance to win. As for hedges, that is why the Europeans ask only one-tenth as much of a Tobin fee for derivative hedges as for regular equities trades. That is already taken into account.
I note that you do not address the biggest reason that HFT is spectacularly unfair. The fact that it gives huge advantages to a cartel of “seated members” of exchanges who can trade with each other for free. This medieval cartel must be broken up. It has no justification whatsoever.
‘j’ since you are one of the brightest dudes on the planet. (automatically true, since you are a fan!) you know there is another, even stronger reason to tax HFT. Go to the article that I link to at the very top of this one. My earlier screed about HFT. There you will find the “skynet-terminator” reason why we must make sure that AI… when it arrives… does not happen in a secret program to lavish billions creating parasitical predator agents without a scintilla of conscience!
Nicloe T, Have a look at my comment about “seated members.” If you can get that cartel broken up, I will settle for an HFT tax one tenth as large! And until that is your core demand… ending the cartel… then please don’t talk to me about “barriers to entry”!
“j” you did not read my challenge, apparently. I defy you to prove that HFT does any of the “services” you describe. It is a quasi cult enterprise justified by a basic premise “efficient seeking of correct pricing” that is pure voodoo, without any justification in thermodynamics or any other functioning system. It is a cult incantation that is diametrically opposite to how the universe works.
On a pragmatic basis, HFT pulls capital OUT and delivers it as massive parasite load to middle men. Companies do not benefit. They get no share. Capital markets have been more a burden to productive enterprise than a servant, for decades.
“J” you clearly have not read The Transparent Society or EARTH. You have no idea that I am the only aci fi author ever invited to give a keynote at the Libertarian Party convention. Try thinking and looking before you snark.
Best to all of you! Follow me to http://davidbrin.blogspot.com/
any time to continue arguing.
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