> However, individuals who buy and hold investments, including those who invest in index funds that trade infrequently
Wait, how is that possible? Are the underlying trades that make up the index not taxed? Do the funds receive some sort exemption? If so, how do I become an entity like that?
Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully). Wouldn't it be simpler to just tax the gains as we do now at a higher rate?
[Later] On second thought this is even worse for folks like me (whether I count as "average" or not I don't know). Most of my trading portfolio exists in the form of index funds in tax deferred accounts. My long hold of those index funds now acts as a back door for lots of taxation that is less obvious.
>Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully).
I don't have a view on whether this is good or bad, but this is exactly what happens in one of the markets with a relatively high transaction tax.
> If the goal is to slow down the market, a transactional tax is needed
The idea that a transaction tax will in anyway slow down the market is dubious to me, that said, if our goal is to limit the number of transactions, why don't we just pass a law that does that?
Even if we did that, it still doesn't follow that it won't impact people who are invested in index funds...
The difference is that individual investors will often hold on to their shares for months or years, rendering the trading tax insignificant.
The tax is targeting (very) short-term professional traders, selling and buying back shares multiple times a day (or per second, in some cases). This type of trading adds little value to the useful allocation of capital, and imposes a 'tax' on other traders.
To me, that sounds like as good a thing to tax as any. Besides, I'd guess that implementation of such a tax would be relatively straightforward, as far as taxes go.
Except most expensive trading stuff is ASICS and microwave links and low latency switches and stuff... not that many trading strategies need the supercomputer to run, as the math is pretty simple.
The trading tax has been hanging over the heads of traders for a long time now. I almost wish they would just create a proper experiment to test it and then repeal it after it inevitably fails (see Sweden for a prime example).
The SEC seems to enjoy "experiments" - the large tick pilot (testing variations on requiring some small cap stocks to trade in increments larger than a penny) is an example of a massive upcoming one. While the large tick pilot suffers from many things - a huge cost to brokers for a dubiously structured experiment - at least it shows a willingness for the SEC to attempt structured experiments. This should be no different.
i never quite understood, why they dropped it. The financial industry claims they produce products, so when buying selling them sales tax applies. For me as private investor (in germany) the tax added up to something like 2DM per year.
Because barriers to trade have worked so great in the past...
This is just another fluff piece without too many rational arguments, based on a completely irrational fear of HFT. Arguably, HFT and hedge fund have made the markets much more micro-efficient in the past decades (as wittnessed by the difficulty of finding new arbitrage opportunities); we have to thank the central banks and big institutional investors for macro-inefficiency.
> one that applies a tiny tax rate to an array of transactions and is split between buyers and sellers
I think the current situation, where exchanges basically "tax" those who take liquidity and reward those who provide it (i.e. the fee of a market order is split between the exchange and the person who entered the limit order) is much better at providing stability to the market.
> which generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability
Well, the idea behind is that prices (e.g. same stock on different markets) should converge. If you don't want that, by all means, tax the market.
> The burden of this tax would be concentrated at the top, because that’s where the ownership of financial assets is concentrated
Nope, it doesn't matter where ownership is concentrated. What matters is where trading is concentrated. E.g. HFT or every time you get paid and invest a portion in your income in a stock index-backed pension scheme.
Exactly, which encourages competition - exchanges can either reduce this tax (earning less per trade, but encouraging more volume), or maybe even increase it (rewarding liquidity more, and so improving the trading process).
I disagree, I think orderly markets are the goal. Ideally, the government should collect as little tax as possible, while providing rules that promote the good (e.g. competition) and discourage the bad (e.g. violence, externalities).
Because barriers to trade have worked so great in the past...
Without commenting on this particular barrier to trade, it's certainly the case that in the past, some nations have put up barriers to trade that have worked out very well for them.
A number of nations that have managed to push themselves from impoverished status to first world over the last 60 or so years did it by shielding their nascent industries with various protectionisms. Japan and South Korea spring to mind.
I think the worry about HFT is mainly that the value to society of adding liquidity does not outweight the cost of the money being extracted by these companies. It doesn't feel like a good deal- it feels like we're all being cheated.
The hard part about analysing whether is actually is good is in trying to figure out just what value we should place on added liquidity.
Can you explain why the value to society of the additional liquidity from HFT outweighs the cost (large profits to companies doing nothing else)? Not being facetious, actually interested in hearing your thoughts on it.
Except that even the Fed now admits that HFT's only add liquidity precisely when it's least beneficial (when nobody needs it) and reduces it when it's needed.
Yep. At risk of adding a "this" comment I've spent years reading on the subject, talking to some of our customers who are HFT, and generally just thinking and learning about it.
I still can't figured out a single value-add they bring to the table, much less to justify their insane compensation or the incredible technology budgets they carry. It's simply sad to me to see some of these brilliant minds (at least on the tech side where I interact) essentially engaged in ripping off fellow citizens at worst and rent-seeking at best.
Of course if you engage them, they will get all hand-wavy about "liquidity" - but I think it's striking that not a single person I've talked to has been able to distill the benefit they bring to society in a simple sentence or paragraph. It always ends with the "most people can't understand" which as I get older I've learned is a euphemism for either "I don't know" or "I don't want to tell you the truth".
Either way, so many billions of dollars taken from the economy and put into useless activity. Absolutely no one will be able to convince me we need millisecond-level liquidity for markets to function efficiently.
HFT don't provide liquidity for liquidity's sake. They make markets more efficient, i.e. closer to the "one true price" (not necessarily the fair price, because there's no way HFTs can outbid all the money collected in index/sovereign founds or printed by central banks). They also reduce the spreads. For an ordinary person, they improve the markets.
The complaint about "brilliant minds being wasted" rings true, but you could make the same complaint about all of finance, and even most of Silicon Valley focused on extracting rents by serving ads - both are ultimately zero-sum games where insiders profit at the loss of society.
I think the ultimate problem is, there are no real problems that smart people could work on and make a contribution (and earn a good living) - or at least I don't see any.
Yes, we can definitely argue about tax/cost vs. liquidity - as I mentioned in another comment, we could have different exchanges encourage different levels of liquidity (resulting in different costs of trading) - investors would then be able to choose what they prefer - liquidity or lower trading costs. To avoid adverse selection, companies could even do it on a per-stock basis (or the regulator could run per-stock experiments, and analyse the effects).
I don't know the details of HFTs in general, but to my understanding, what they do is arbitrage (orthogonal to liquidity) - basically, making sure that any simple patterns in the price are exploited (and thus reduced). Note, however, that HFTs themselves don't make money - the markets could be just as efficient if only HFTs would participate, and with any new piece of information (earnings release, news, movements of other prices) a new equilibrium would establish (best bid and best ask) without any trades happening. Trading either comes from (1) disagreement about the price - and the person who's right earns money, rightfully IMO (and if you don't want to lose money, just don't play), or (2) external circumstances (e.g. you want to buy a house => you need money => you sell your stocks), in which case HFTs are actually helping you (reducing the spread, and still earning money - e.g. a "stupid market maker" offers you 100 and then sells it for 101, earning 1, whereas the "smart HFT" offers you 100.01, and then sells it for 101, earning 0.99 - and you're better off as well).
This isn't the whole story, of course - there's probably a lot of illegal things going on (dark pools, front-running, order flow selling), and a lot of waste could be reduced (e.g. by regulators forcing HFTs to share/rent infrastructure and only compete on algorithms, or mandating everyone has the same delay to the exchange), but those are problems only if you let HFTs exist.
I think you have it the other way around: liquidity providers as a group make less money because of HFT, not more. Ordinary investors now pay less for liquidity than they used to because of HFT and the complaints are largely coming from traditional liquidity providers who were able to extract more for providing liquidity in the absence of competition from HFT. It is a zero-sum game but I think you're ignoring the presence of other rent-seeking players that HFT has now outcompeted.
Now things are a bit more complicated because HFT is a fairly broad term but this is true in a broad sense.
This is a stupid way to get a progressive tax system. If you want a progressive tax system just do it and don't mess around with complicated schemes to avoid the political consequences of it. Tax the wealthy at 60-70% and everyone else at 30-40% and provide decent social services and be done with it.
...and a huge bureaucracy so that we can be certain that the social services are decent (since we won't be able to gauge efficiency or utility by supply and demand market pricing)...then huge organized labor and pensioning systems to attract and vest people into a system...
Since we already have these last two, then taxing the wealthy seems like a good way to go, except that you need to expand the concept of wealthy to actually make enough money; all the while the "wealthy" will find ways to protect their wealth.
It might be easier to simply print more money and give it to government agencies, but then other nations will probably value your currency less due to inflationary bloat.
It's not hard to see who benefits from these taxes. You avoid the tax by trading a swap/CFD/forward (outside the U.S., if necessary). This means that your market maker is a bank instead of an HFT firm. More of the order flow becomes internalized so there's less incentive to post competitive quotes on public exchanges. I think it's very telling that many of the articles talk about the evils of HFT without addressing internalization.
It's true that this type of tax can easily be avoided, but the real problem is that it incentivizes trading to move from public exchanges to banks' walled gardens.
This is true. I'm consistently amused at how the transaction tax gets advertised with "BANKS HATE THIS," when banks would love it. And when banks love something, you better believe that it's not in anyone else's best interest.
It's interesting people always cite the UK's stamp duty on share transactions as an example for how to stop high frequency trading. The rate is 0.5% when buying and 0% when selling. Market makers (of which high frequency traders are a subset) do not pay this.
"Stamp duty shall not be chargeable on an instrument transferring stock of a particular kind on sale to a person or his nominee if—
(a)the person is a member of an exchange
(b)the person is an intermediary"
"an intermediary is a person who carries on a bona fide business of dealing in stock and does not carry on an excluded business"
So the profit of the entire industry is a rounding error, but they're somehow fleecing everyone? And they provide tiny spreads, which clearly benefits individual investors.
The NYT article says a FTT is necessary to protect from HFT, but they don't really have evidence of that. The study they link makes the case that a FTT would raise lots of revenue without distorting trading too badly, but admits that the effect on market volatility is unclear. But raising taxes so that the government makes more money is not going to be as good a slogan as raising them to punish some hyped-up evil doer.
FTT's are bad. There are no models which show that they generate any revenue having been extensively researched in both the EU and UK. The basic rule is that the more you tax something the less of it occurs. FTT's are not only extremely expensive taxes to administer they also reduce overall economic activity and have been overturned everywhere they have been tried.
33 comments
[ 4.5 ms ] story [ 91.3 ms ] threadWait, how is that possible? Are the underlying trades that make up the index not taxed? Do the funds receive some sort exemption? If so, how do I become an entity like that?
Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully). Wouldn't it be simpler to just tax the gains as we do now at a higher rate?
[Later] On second thought this is even worse for folks like me (whether I count as "average" or not I don't know). Most of my trading portfolio exists in the form of index funds in tax deferred accounts. My long hold of those index funds now acts as a back door for lots of taxation that is less obvious.
I don't have a view on whether this is good or bad, but this is exactly what happens in one of the markets with a relatively high transaction tax.
For example, a mandatory delay for all orders. Or auctions every 1/2/5 minutes.
The idea that a transaction tax will in anyway slow down the market is dubious to me, that said, if our goal is to limit the number of transactions, why don't we just pass a law that does that?
Even if we did that, it still doesn't follow that it won't impact people who are invested in index funds...
The tax is targeting (very) short-term professional traders, selling and buying back shares multiple times a day (or per second, in some cases). This type of trading adds little value to the useful allocation of capital, and imposes a 'tax' on other traders.
To me, that sounds like as good a thing to tax as any. Besides, I'd guess that implementation of such a tax would be relatively straightforward, as far as taxes go.
I'm dubious about every part of your argument, but even if I weren't it still doesn't hold that long term index "investors" aren't impacted by this.
The SEC seems to enjoy "experiments" - the large tick pilot (testing variations on requiring some small cap stocks to trade in increments larger than a penny) is an example of a massive upcoming one. While the large tick pilot suffers from many things - a huge cost to brokers for a dubiously structured experiment - at least it shows a willingness for the SEC to attempt structured experiments. This should be no different.
P.S. For those interested in Sweden - a report considering a transaction tax in Canada that discusses it: http://www.publications.gc.ca/collections/Collection-R/LoPBd...
This is just another fluff piece without too many rational arguments, based on a completely irrational fear of HFT. Arguably, HFT and hedge fund have made the markets much more micro-efficient in the past decades (as wittnessed by the difficulty of finding new arbitrage opportunities); we have to thank the central banks and big institutional investors for macro-inefficiency.
> one that applies a tiny tax rate to an array of transactions and is split between buyers and sellers
I think the current situation, where exchanges basically "tax" those who take liquidity and reward those who provide it (i.e. the fee of a market order is split between the exchange and the person who entered the limit order) is much better at providing stability to the market.
> which generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability
Well, the idea behind is that prices (e.g. same stock on different markets) should converge. If you don't want that, by all means, tax the market.
> The burden of this tax would be concentrated at the top, because that’s where the ownership of financial assets is concentrated
Nope, it doesn't matter where ownership is concentrated. What matters is where trading is concentrated. E.g. HFT or every time you get paid and invest a portion in your income in a stock index-backed pension scheme.
I like you explaination, but exchanges are nowadays mostly private companies so the 'tax' goes to shareholders and not to the state.
Without commenting on this particular barrier to trade, it's certainly the case that in the past, some nations have put up barriers to trade that have worked out very well for them.
The hard part about analysing whether is actually is good is in trying to figure out just what value we should place on added liquidity.
Can you explain why the value to society of the additional liquidity from HFT outweighs the cost (large profits to companies doing nothing else)? Not being facetious, actually interested in hearing your thoughts on it.
Don't buy into the HFT "adding liquidity" myth.
I still can't figured out a single value-add they bring to the table, much less to justify their insane compensation or the incredible technology budgets they carry. It's simply sad to me to see some of these brilliant minds (at least on the tech side where I interact) essentially engaged in ripping off fellow citizens at worst and rent-seeking at best.
Of course if you engage them, they will get all hand-wavy about "liquidity" - but I think it's striking that not a single person I've talked to has been able to distill the benefit they bring to society in a simple sentence or paragraph. It always ends with the "most people can't understand" which as I get older I've learned is a euphemism for either "I don't know" or "I don't want to tell you the truth".
Either way, so many billions of dollars taken from the economy and put into useless activity. Absolutely no one will be able to convince me we need millisecond-level liquidity for markets to function efficiently.
The complaint about "brilliant minds being wasted" rings true, but you could make the same complaint about all of finance, and even most of Silicon Valley focused on extracting rents by serving ads - both are ultimately zero-sum games where insiders profit at the loss of society.
I think the ultimate problem is, there are no real problems that smart people could work on and make a contribution (and earn a good living) - or at least I don't see any.
I don't know the details of HFTs in general, but to my understanding, what they do is arbitrage (orthogonal to liquidity) - basically, making sure that any simple patterns in the price are exploited (and thus reduced). Note, however, that HFTs themselves don't make money - the markets could be just as efficient if only HFTs would participate, and with any new piece of information (earnings release, news, movements of other prices) a new equilibrium would establish (best bid and best ask) without any trades happening. Trading either comes from (1) disagreement about the price - and the person who's right earns money, rightfully IMO (and if you don't want to lose money, just don't play), or (2) external circumstances (e.g. you want to buy a house => you need money => you sell your stocks), in which case HFTs are actually helping you (reducing the spread, and still earning money - e.g. a "stupid market maker" offers you 100 and then sells it for 101, earning 1, whereas the "smart HFT" offers you 100.01, and then sells it for 101, earning 0.99 - and you're better off as well).
This isn't the whole story, of course - there's probably a lot of illegal things going on (dark pools, front-running, order flow selling), and a lot of waste could be reduced (e.g. by regulators forcing HFTs to share/rent infrastructure and only compete on algorithms, or mandating everyone has the same delay to the exchange), but those are problems only if you let HFTs exist.
Now things are a bit more complicated because HFT is a fairly broad term but this is true in a broad sense.
Since we already have these last two, then taxing the wealthy seems like a good way to go, except that you need to expand the concept of wealthy to actually make enough money; all the while the "wealthy" will find ways to protect their wealth.
It might be easier to simply print more money and give it to government agencies, but then other nations will probably value your currency less due to inflationary bloat.
It's true that this type of tax can easily be avoided, but the real problem is that it incentivizes trading to move from public exchanges to banks' walled gardens.
http://www.legislation.gov.uk/ukpga/1997/16/section/97
Edited extract:
"Stamp duty shall not be chargeable on an instrument transferring stock of a particular kind on sale to a person or his nominee if— (a)the person is a member of an exchange (b)the person is an intermediary"
"an intermediary is a person who carries on a bona fide business of dealing in stock and does not carry on an excluded business"
"[HFT] generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability"
Considering this fact:
"TABB Group estimates that US equity HFT revenues have declined from approximately $7.2 billion in 2009 to about $1.3 billion in 2014."
Source: https://www.fas.org/sgp/crs/misc/R43608.pdf
So the profit of the entire industry is a rounding error, but they're somehow fleecing everyone? And they provide tiny spreads, which clearly benefits individual investors.
The NYT article says a FTT is necessary to protect from HFT, but they don't really have evidence of that. The study they link makes the case that a FTT would raise lots of revenue without distorting trading too badly, but admits that the effect on market volatility is unclear. But raising taxes so that the government makes more money is not going to be as good a slogan as raising them to punish some hyped-up evil doer.