Sunday, February 10, 2013

Why a Transaction Fee Matters to You

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.

SolutionNow, 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.

TransactionFeeTerminateIf 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.)

FindRepresentativeNow 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.

chasing_ice_xlgWatch 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. 

WeThePeopleNow 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."

42 comments:

Ian said...

"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."

Have you considered David that markets are neither mechanical or biological systems and that they operate on different principles?

I don;t see economists lecturing physicists on dark matter or evolutionary biologists on the hologenome, why does every single non-economist on the planet feel qualified to lecture me on economics?

Pontus Gagge said...

Ian: sorry to be blunt, but those are actual sciences.

Russ Abbott said...

The fee should be per submitted bid or offer rather than per transaction. the HFTs are ruining the markets by flooding them with bids/offers that are instantly withdrawn. That should be stopped.

Dan Thompson said...

On contacting your Congress-critters, I have been told that they tend to apply different weights to the letters they get based on the method of contact, i.e. phone, fax, email, typed letter, and handwritten letter. Apparently handwritten letters get the top weight, but typed letters are close behind. As such, I usually take the extra time and effort to print and mail my letter rather than simply send an email.

Ian said...

Pontus, and your determination that economics isn't an "actual" science, is based on what exactly?

Randy Winn said...

@Ian
1. Rather than telling us to STFU, why not address the issue: Did the economist Tobin come up with a good idea?

2. Most of us have enough acquaintance with basic economic realities to understand that some of the prescriptions of HFT fans are utter nonsense. If a quantum physicist were to tell me that my computer just might turn into green cheese (... there is, after all, a small chance of it ...) I would feel quite comfortable lecturing him on the irrelevance of his claim to solving any immediate problem.

3. Economics is an intellectual discipline in which one can practice science, but unlike the harder sciences, we observe in economics as in psychiatry and theology a sad tendency for some to use its trappings for mere politics of self-interest. We observe that in the softer "sciences" there is much less of a corrective discipline imposed by the raw forces of nature than there is in physics or chemistry. One might call objective reality a form of physical criticism less available to the softer sciences.

For pertinent example, if an economist were to maintain that HFT encourages market health, and an objective observer were to observe that the contrary is true, which of them would be acting more like a scientist?

Jumper said...

In that info file I also keep my state senator and my senate district number, and mt state house rep and state house district number, my city and county leaders.

I got a phone call from my U.S.Senator's office once, but it was because I had emailed recommending increased safety regs for offshore drilling. This was a week before Deepwater Horizon. They called afterward.

Jumper said...

High speed trading was happening in '08, right? And this helped smooth things how, exactly?

David Brin said...

Ian, the quants make a grand, a-priori declaration that the finding of the equilibrium price of a security is automatically and in itself the ultimate desideratum and that that will automatically lead to "efficient" capital markets and allocation of resources. That absolute, platonic declaration is then used to support everything else they do. They never, ever ever support the axiom, however, they simply repeat it over and over.

In fact, there are other systems of competitive wealth generation. Evolution. Animal metabolism. Engineering. Physics and chemistry. In NONE of these systems does eliminating gradients improve the system's ability to get things done. It always always ELIMINATES the ability to get things done.

It is the argument of the parasite. Of the intestinal worm. "I extract and eliminate the gradient, forcing the lion to go out and eat more gazelles just to stay alive! I am the hero!"

The true villainy here though is not HFT. It is a cartel of "seated" members of exchanges who can tax the rest of us with commissions but trade with each other commission free, It means HFT is inherently unfair. It is obscene.

LarryHart said...

Tangential to the topic, but a few posts back, someone here made the assertion that without a commodity (such as gold) backing our currency, our entire economic system is "faith based".

After mulling this over for weeks now, isn't that true even WITH a gold standard?

What I mean is this--when I trade a day's work for money, I do so with the expectation that I'll be able to purchase stuff that I want with that money when the time comes. Had I worked for 20 years with the express intention of buying Twinkies after retirement, I'd be out of luck, right? Money in and of itself is no guarantee that what you want to buy will in fact be available when the time comes. In that sense, all economics is faith-based.

The gold-bug counter argument is that gold is intrinsically valuable--that a worker trades his labor for the gold itself and that the gold IS what he wants. Trading gold for other things is only of secondary importance.. If I can't buy Twinkies with my gold, it's ok, because I still have the gold, and that in itself is worthwhile. This is supposed to be somehow qualitatively different from "I still have the green pieces of paper issued by the US Treasury department." I'm not so sure it is.

If you work (say as a farmer) to feed, clothe, and shelter yourself, and only then trade your SURPLUS for other things, you can claim that the surplus has intrinsic value aside from what you can trade it for--at least up to a point. Extra raw meat or milk is of limited value without refrigeration, but some kinds of food and firewood and stuff can certainly be stocked away for later use if there's nothing good to trade it for. But that has little to do with the gold standard.

My claim here is that in advanced economies where people DON'T provide their primary needs, but instead work for money to buy the means of survival, ALL economic activity is "faith based" in the sense that there is no ironclad guarantee that the particular stuff you need will be available for trade when you need it. This is equally the case whether your money is green paper, computer digits, or gold. The problem isn't "solved" by backing one's currency with precious metals.

Ian Gould said...

"@Ian
1. Rather than telling us to STFU, why not address the issue: Did the economist Tobin come up with a good idea?"

1. The only people in this thread who have said anything approaching "Shut the Fuck up" are you and Pontus.

You'll be glad to know that after this post, I will follow your advice.

Enjoy the echo chamber.

2. George Tobin proposed what became known as the Tobin Tax in 1972. He died in 2002. His proposal had nothing to do with HFT which didn't even exist at the time.

I do note though that while economists who disagree with you are the running dogs of the capitalists/commies/Freemasons (or however you choose to categorise the bad guys in your personal mythology) those who agree with you are A-OK.

3. nothing in my initial post had anything to do with HFT except tangentially since I was objected to a much more fundamental point in David's post -the idea that markets somehow had to operate in accordance with laws drawn from a totally different scientific discipline. You know, like how population genetics has to operate on the same rules as quantum dynamics.

4. If you had actually read my posts on previous topics related to this I actually favor a much more extensive Tobin Tax and at a higher rate. But disregard that. I am the enemy, after all.

5. When you place yourself in the context of the "objective observer" who knows nothing about a discipline but feels qualified to critique on a "common sense" basis you place yourself in exactly the same position as the anti-vaxxer saying "Think of the Children" or the supporter of Intelligent Design asking "If humans evolved from monkeys why are there still monkeys?"

Have you, for example, compared the economci recovery in the US with previous economic recoveries prior to the introduction of HFT; have you attemtped to correlate internationally the perforamnce of different economies with the prevalence of HFt?

Of course not, that's the sort of thing those dreadful pseudoscientitific economists would do.

Much better to go with your gut feeling.





Jumper said...

LarryHart, I've been pondering the gold bugs too, lately, and realized the other day that a big part of the "faith" is faith in rule of law and fair contracts, such fairness to be enforced. And if gold is to hedge against civil disorder, then that faith in fair contract enforcement might be a bit paradoxical.

Tangent to the other matter:
A few years ago I worked for a big manufacturing corporation, and day trading was about as fast as it got, but as I tried to figure where my ultimate allegiance should go while I worked there, I first said to myself "The stockholders. I should make them a profit." I then wondered about the ones who own that stock for one day, or a week. What do I do for them? What should the executives do for them?

Several possibilities arise. You could jack up the price by any means necessary, so the short term people can sell. Or you can focus on long term, and the short-termers be damned.

What if the majority of the investors own the stock for 22 seconds? What paradigm do I use to remain loyal to their interests?

LarryHart said...

Jumper,

You raise an interesting question there.

As I understand it, a corporation's fiduciary duty is to maximize value for its stockHOLDERS. Which is not the same thing as maximizing the profitability of churning the stock. Someone who has bought and sold the stock is no longer a stockHOLDER.

I realize I'm splitting hairs here, but I think it's worth raising the question as to whether a corporation's duty to its stockholders pertains to those who churn the stock but don't HOLD it.

DavidTC said...

What on earth is the point of exempting the first 100 transactions except to make the entire thing impossibly complicated? Now you have to keep track of who is submitting each transaction, and somehow keep a total of that, despite the fact they could do it with different stocks and even in different markets. And how does that work with things like stock-based mutual funds?

And you have to keep track of all that to save hypothetical 'common people' that make such a small _number_ of stock purchases each year that the first 100 is at least a noticeable percentage of the total transactions, but that _value_ of those transactions is so large that they'll notice a damn 0.03% tax.

'Normal people' who have stock are one of two kinds of people. They invest anywhere from a fifty to two hundred a month out of their paycheck, in which case this exemption would them save a grand total of between $1 and $6 dollars a month, for a grand total of $12-$72 a year. Yeah, that seems worth it.

Or they are day traders, in which case...uh, same thing, really. Normal people make _small_ investments, and hence would pay a small amount of tax. Admitted, some day traders make a lot of trades a year...but this exception wouldn't help them much! They'd run out of exemptions in like a month!


I can't even conceive of an example where this would make the slightest bit of sense. Is this to save the money of people out there who buy $100,000 worth of stock...twice a week? That would save them thirty thousand a year...but considering they bought _ten million_ dollars worth of stock that year, there's not really any point to that.

Rob Powell said...

A point of clarification on the transatlantic cable mention. No new transatlantic cable has gone into service in 10 years. I assume David is referring to the Hibernia Atlantic 'Project Express' cable which aims to lower latency and get the traders to pay for it. But this transatlantic cable has not yet been completed and won't be in service until next winter last I heard.

David Brin said...

Ian chill man. No one is the "enemy". We have a very thick skinned group here and non-trolly and generally non-angry. You are appreciated.

Thanks Rob

adiffer said...

Ian,

The markets aren't mechanical? Hmm... I have little doubt that you are correct there, but last I checked the options market used pricing models with a heat diffusion nature at the core. My background is physics and my experience with options pricing a little old, but I remember very clearly wondering how in the world they dealt with the fact that real humans could behave in correlated ways reducing the assumed randomness of motions at the core of the model. If you all have a non-mechanical, non-thermodynamic model in use today, please speak up. I strongly suspect you don't, though. To pull that off would be a bit like physicists inventing new math to solve problems. It happens SO rarely one can safely assume it doesn't. The few who have managed it... were very mathematical.

Besides, physicists like to pick at EVERYONE'S field and say it is simpler than it really is. Chemistry is just about interacting electrons in complicated potential fields, right? Heh. It is very egotistical of course, but it is common.

With economics, though, we run into trouble. Economics isn't a science and isn't even close. What are we supposed to say then except it looks like hocus-pocus? I tend to point out the small but significant difference between a model and a theory. When we model a system, we expect it to predict the system's behavior in a limited domain. When we present a theory for a system, we expect it to explain the system's behaviors. An economist who thinks they have a theory is confused. The closest thing I've seen to a theory for them is an anti meta-theory explaining what a system is NOT doing and can never do. All the rest are models.

David,

Be careful with the argument for raising money for government. You will lose a lot of supporters with that approach. You'll win a bunch too, but they are also the people who will argue it is 'fair' to tax rich people even though they can't describe what 'rich' is. Progressives use 'fair' as a measure, but it is an arbitrary measure, thus vehemently opposed by many... including me.

What you are pitching is the introduction of a resistive medium to the movement of money. Many are quite convinced that resistance is bad because it slows legit price adjustments and is commonly used by the lords with seats as a way to rake in a percentage of a transaction. No matter how you argue it, someone is taking in the money if there is any resistance at all.

I suspect the best analogy you have is that of the parasite. It doesn't matter who the parasite is (seat owner or regulator)... they get fed by the resistive fee. The question boils down to who do we want to feed in order to avoid speculative bubbles? You would pick the regulator at this point, but I'll remind you (once) that regulators get captured. How is this an improvement? When they get captured, we have a much worse situation in that the tape worm ALSO determines the market rules.


Removing the constraint on the number of seats is the way to go. Such constraints could be attacked as a de-facto monopoly. That isn't enough, though, until you also decentralize trading. The traders with the shortest fiber to the trading floor have an advantage that is hard to beat. Remove the seat limits while imposing limits on how centralized the systems can be and you might be able to minimize feeding of any type of tapeworm including the type that can be taken over by another type.

De-centralization also spreads the talent out a bit and mitigates the incestuous relationships between them. It might (maybe) also help drive some diversity among the models they use. The real danger I see is the risk that the current models are really modeling each other. Reduce the diversity among them and their behavior can become unexpectedly coherent.

Matvey Ezhov said...

Taxing the transactions is rather bad way to deal with the problem of unfair cooperation between exchanges and largest participants. Want to address that? Regulate directly what services trading venues can provide for free and for profit, for example as activities that limit competition.

If you want to make life harder for HFT shops but not for the rest of finance community, tax order cancellations. Transaction tax of noticeable size (0.003% is still noticeable) would very likely dump trading volumes, since volumes would move offshore, which is not only diminishes projected tax revenue but also is bad for national economy in general.

Further, someone would have to fill the roles of new market makers, which HFT shops are currently sort-of playing (they do it well while order flow is two-sided). Who would do that if not banks and other big institutions? How would they be paid for it, in the venues where trading volumes are small and the orderflow is sparse? They will widen spreads, probably for significantly more then 0.003%.

You can reinstitute market-makers, so that certain institutions would be exempt from the tax in exchange for their obligation to maintain two-sided quotes no wider then certain amount and no smaller then certain size for all times. This is might help but , as we know, as long as there are rules, there will be ways to exploit them.

In general, I would agree with Ian. One have to read at least couple of book on market microstructure (or have a lot of practical experience) to be able to meaningfully contribute to discussion.

Carl M. said...

Methinks the problems are less the number of transactions, or even the speed per se. The bigger problems are:

1. The use of leverage.
2. The disengenuous bids and asks.

With leverage, liquidity does NOT necessarily lead towards equilibrium. Traders can get into positions where they trade against their predictions in order to cover their positions (c.f. short squeeze, margin call).

The fake bids and asks add noise to the system.

I would suggest that we need a rule that says any bid or ask must stay in effect for a human readable amount of time. 5 or even 30 seconds. Trades could still happen more quickly -- when a bid or ask immediately clears.

As for the parasite analogy, I would point out that we have had market makers long before we had computerized trades. And if we had narrow bid/ask spreads, small investors would benefit -- save for small time day traders.

David Brin said...

adiffer, the "resistance" metaphor is loaded to help them push their cult belief that efficiently removing all gradients is the ultimate good. But buyers and sellers NEED the gradient -- the difference between the buyer's perceived expectation of a rise and the seller's expectation of a fall in price. As a lion needs the energy gradient stored in the gazelle's flesh. The HFT guys are like intestinal parasites taking a nibble out of ever bite the lion eats, robbing him of incremental value and ensuring he has to go kill more gazelles to survive.

Matvey, you wave incantations very nicely, but they are still based upon the fundamental premise that it is a good thing to narrow market spreads to zero. That is a cult premise. An axiom diametrically opposite to the way physical systems, organisms and machines work.

THe fundamentals are : 1) preserve usable gradients for human traders, 2) eliminate the cartel of seated members, 3) stop billions from being poured into AI that is programmed (in secret) to be fundamentally parasitical and predatory and amoral (at best.)

Tom said...

David, completely unrelated comment but thought as relates to the history of Science Fiction writing this video was pretty cool stuff. Music has gotten considerable mention in Science Fiction with various authors sprinkling mention of space-themed music in their work from time to time. But we don't have any music that is space related. Maybe now that will change as this shows that Canadian astronaut Chris Hadfield can write, and sing, some damn good space music.

http://youtu.be/Cj0xADpjSW8

Randy Winn said...

@Ian - I dispute the factual basis of your many claims against me, but since you answered the question about the Tobin tax, they don't matter.

You have no enemies here. It can be difficult for a professional in any field of study to deal with outsiders who are not stupid but merely lack information which you could provide if you chose; to use your example, when someone asks "If humans evolved from monkeys then where are the monkeys?" the most useful answer is to say "Humans didn't evolve from monkeys, we both evolved from a common ancestor".

adiffer said...

David,

I get that gradients are good. I wouldn’t choice to buy anything if I didn’t perceive a gradient of some kind. That works from immediate personal needs to abstractions involving retirement plans. We all buy and sell the gradients we perceive. The problem with gradients is that for historical reasons some of them are artificially induced by market makers in order to pay them for the service they provide. Historically, they are seen as parasites taking the nibble out of our bite and because they had a lot of sway over market rules they grew fat. The push to remove them is sold to us as an elimination of resistance, but anyone who knows how the markets work knows the sales pitch is BS. As you point out, there are still parasites (seat owners) and it is they who grow fat now.

Anyone who can anticipate the trade of another can anticipate the gradient they perceive. Some are better and faster than others, but anyone reading the financial papers looking for ideas is doing what is fundamentally the same as the AI’s. The AI’s have a distinct advantage in that they have spatial proximity to where trades occur, so they can use temporal and spatial data while the rest of us slobs are stuck with temporal stuff. If I think a political upheaval in South Africa is going to impact gold prices in the future, I perceive a gradient and can trade on that, but an AI close to the ‘market’ can act on the fact that I am acting and nibble away . I’m trading on the gold gradient while the AI trades on the gradient I create by acting. I see no fundamental difference between us as I would use the spatial advantages if I could.

If you try to preserve gradients for human traders you run the risk of fighting the AI tsunami coming at us. I suspect you want to fight that fight, but I’d rather do the judo thing and adjust to them thus minimizing their power over us. We fight back against the AI’s by raising them as children and obviously we can’t do that until they become quite sophisticated. While the greedy SOB’s are nibbling at our bites, we adjust and force them to produce that sophistication. That’s my preference.

I’m with you on eliminating the cartel, but I think you have to decentralize trading at the same time. Close traders have a spatial advantage they use like the hyenas have when the follow the lionesses who work together. Spread them out and you’ll get diversity among the hyenas.

duncan cairncross said...

Hi Guys

The Tobin Tax
When I worked in industry we were always worried about share prices -
Worried about their effects on the business
It seemed that a minor change could be amplified by a sort of crowd thought into a dangerous fluctuation

This often seemed to lead to perfectly viable businesses hitting a financial wall and going bust or being asset stripped

As an Engineer the market appeared to act like a machine with no damping

The Tobin Tax would act like viscous damping providing a greater "force" the faster the shares traded

This was the reasoning before the introduction of HFT

Joel Greenwood said...
This comment has been removed by the author.
Joel Greenwood said...

Deja vu?

Did you actually suggest that the rating agencies should get tax dollars, rather than jail sentences for causing the Great Recession? David, sometimes you completely surprise me.

HFT will not be stopped by a 0.03% tax. The UK has a 16x bigger 0.5% stamp duty/tax and the London HFT percentage is still over 60%. HFT is not responsible for the Great Recession (which was implied that the HFT crowd and the MBS crowd are one and the same).

Nothing stops you or I from creating our own open source Exchange and charging companies to list. The Alpha exchange in Canada and the BATS use a similar web of external matching systems to bypass the TSX or NASDAQ. Or you can use Dark Pools (where market participants don't have to show their volumes, thereby rendering HFT's advantages useless) and Iceberg orders (hiding part of your order on a regular exchange, replacing the visible order as the first is filled etc).

High Frequency Trading has been done for decades, nickel and dime-ing by "Pro" traders who also act as market makers (guaranteeing a price when no other market exists). I understand how you see their role as unfair but they serve a purpose. HFT does what those "Pro" traders do - but better.

Finally, I see no reason to exclude the first 100 trades of the average Joe or only on IPO's (which you laughably see as less corrupt). This smells entirely of "We'll tax the other guy but not you" that's so pervasive in short-sighted democracies.

David Brin said...

Somebody has to pay the guys who rate bonds. I would rather they were not directly paid by those whose bonds they are rating. ANY other arrangement is better.

adiffer said...

Heh. I suppose feeding tax money to ratings agencies might help prevent US Treasuries getting down-graded in the future, right? Aren't we suing one of them right now for what they allegedly did in that regard? Sounds like an opportunity for collusion. 8)

Parasites serve a biological purpose. Diversity among parasites feeding on a single organism is a decent measure of the health of the whole ecosystem.

Paul451 said...

Randy,
"when someone asks "If humans evolved from monkeys then where are the monkeys?" the most useful answer is to say "Humans didn't evolve from monkeys, we both evolved from a common ancestor". "

I've always hated that come back, it's incredibly deceptive, and the sort of "clever-wrong" response that sets many a young creationist on the wrong path. If we had a living example of the common ancestor of humans and all existing monkeys, it would be placed in the monkey (simian) family/suborder. Why pretend otherwise?

The better response, IMO, is to point out that the questioner himself has still living parents, perhaps even grandparents. Let them ponder that.

(encepean: Hypermind hominin)

Anonymous said...

The Tobin tax seems like a good idea, in terms of impact.

BUT it appears to be a "direct tax" - a tax on property, specifically on personal property being traded.

As such, it is covered by the Constitutional requirement that it be apportioned to each state based on population.

That requirement has been considered so onerous, that there are no direct taxes today except the income tax, for which there is an explicit Constitutional exemption.

A transaction fee isn't an income tax, as it would apply even if there is a loss in the transaction.)

Anonymous said...

@DavidTC - your point is correct, but check your math - it's even more trivial than you stated:

"'Normal people' ... invest anywhere from a fifty to two hundred a month ... this exemption would them save a grand total of between $1 and $6 dollars a month, for a grand total of $12-$72 a year."

12months * $200 = $2400/yr. Times 0.0003 (0.3%) equals 72 cents a year!

locumranch said...

The Tobin Fee would undoubtedly stabilize market volatility & maintain the status quo. The question is "Why would anybody want to maintain the status quo when our initial assumptions are suspect?""

Our first assumption is that the Market is somehow "impartial", "free" and/or "self-regulating", but it cannot be any of these things when less than 5% of the population controls greater than 90% of market assets.

Even the most reputable market rating agencies are suspect. The Dow Jones Industrial Average is owned by the CME Group and the S&P 500 is owned by McGraw-Hill. Both are "For Profit" businesses united in joint venture (http://www.ft.com/cms/s/0/e226b404-06eb-11e1-b9cc-00144feabdc0.html#axzz2KhZWZiSw).

Our second assumption is market gradient errors (the differential between perceived value of buyers and sellers) are somehow "natural" and/or "healthy". They are not. As evidenced by the LIBOR scandal, these gradient errors have been artificially introduced to allow for "profit taking".

Our third assumption is that extreme market volatility is somehow "accidental". It is not. Akin to the practice of "churning", it has been deliberately introduced to maximize profit taking potential by escalating short-term market fluctuations.

But, perhaps, our biggest assumption is that 'Society in General' benefits from such obscene market manipulation. It does not. Akin to the "Social Pacification Index" (as postulated by Brunner in 'Shockwave Rider'), the "Free Market" speaks like a ventriloquist's dummy and the beguiled public follows, allowing the financial elite to lead from behind and direct society down certain preconceived channels, maintaining the status quo.

Best.

reformed tourist said...

I note that there is an aspect to the arguments as to whether a transaction fee imparts a good (healthful corrective) factor or bad (regressive market impedance or for that matter, anti-capitalist infringement on "property") which is not considered.

The question of what makes and supports the market infrastructure presupposes the existence of a public sector (government per the Adam Smith prescription) that does all those necessary things to codify an economy. Indeed, in this instance, since the root commodity being traded is "money," then the need for both public sector involvement is primary not only by guaranteeing the unit value but also regulating to some degree the type and flow of transactions since the secondary and tertiary effects of such transactions in the economy are so significant.

Given that the Public Sector must be involved, the question of paying for that involvement is raised. It would appear obvious that this is one instance that the "user" tax model is the most relevant.

Curiously, those who usually propound such schemes are the ones in this case who oppose its imposition...

David Brin said...

I agree. without a strong public participant, you always got feudalism, which is the worst enemy of creative markets

Off to buy a new 27" iMac... my 1st new computer in 10 years! Any warnings?

adiffer said...

The public sector has never successfully defended the value of a currency they provide. Indeed, they have a conflict of interest as they issue their own bonds in the market. Inflation is your friend if you are a debtor offering fixed rate instruments.

If people want to defend the value of their money, break the monopoly on the issuance of legal currency. We have sufficient computing resources now to manage a heterogenous spot market for the currencies that emerge. If we adopt some of the lessons learned about transparency and parasites, we could at least argue that we aren't holding to that definition of insanity where a person tries the same thing over and over expecting different results each time.

Maybe this time they won't inflate the currency! Maybe this time the regulator won't get captured! Maybe this time the big guy will respect the needs of the little guy!

adiffer said...

Warning for large iMac's:

Bring a towel to wipe up the drool some of us leave. Sorry about that. The same warning applies to the giant monitors they sell for the regular Mac's too.

Don't try too hard to do what you are used to doing on the older machine while using the newer machine. Try to adopt the new tools. You'll wind up with options you didn't even realize were available.

Don't let them upsell you too much on care packages and subscription services. Treat your machine well and it will treat you well. If it ever doesn't, you remind them you have an audience when that time arrives. 8)

reformed tourist said...

Adifers' admittedly accurate (though in a limited sense) criticism of the Public Sector's record of defense transforms this argument into the more purely political realm wherein the nature of safeguards i.e. checks and balances is the real topic.

By and large, the failures on the part of the Public Sectors' stewardship failures can be attributed to those occasions when either they have become the captive of the Private interests and/or have engaged in ill-advised adventures of their own i.e. corruption or malfeasance.

The larger point is that the market is inherently incapable of regulating itself to a role within a self-sustaining economy. That is the observable history under a variety of political systems up to the imposition of functioning democracies. And it is important to note that even within such a democracy, the nature of the "marketmakers" continues to a quest to ceaselessly acquire advantage.

Over-focusing on the question of currency (and its manipulation) is to concern yourself purely with the convenient fiction that is adopted to make the system work rather than the nature of the system itself. Granted that the provenance of currency might become mutable under the idealized (libertarian?) data-driven "value" market Adifer suggests, I find it unlikely that it would find much applicability in the world where goods and services were actually individually and broadly exchanged as opposed to the casino where only securities are traded.

reformed tourist said...

Apologies: I twice misspelled "Adiffer" (for some reason the second f was a toughie.

adiffer said...

Heh. No problem.

I don't know that anyone knows an answer that would work including the libertarians. It just strikes me as nuts that assume the regulator (who is also a debtor) gets a monopoly on printing currency.

My most recent reading experience on this is Hayek's 'Denationalization of Money' piece from the mid-70's. It was an era of high inflation and he argued for a break from discussion of the usual things we were willing to try as solutions for something truly revolutionary. More debate should occur before new designs are considered, but his approach has the benefit of removing authority's power to force inflation as a way to solve their debt load, thus I think it should be considered.

This has little to do with David's topic, though, so I'll stop. I see a new post up anyway. 8)

reformed tourist said...

We have run the topic out a bit, but I'll suggest that for an entertaining read a little more enjoyable than Hayek (though similarly dense in detail), if you haven't read David's colleague Neil Stephenson's Baroque Trilogy you might find his depiction of the birth of the modern economy great fun. He deals with re-coinage, the Liebnitz/Newton conflict, and so much more.

Jumper said...

Currency is overrated.

Anonymous said...

The Economist just argued against the proposed implementation of this tax in Europe:
http://www.economist.com/news/leaders/21572205-plans-transactions-tax-ought-be-dropped-bin-it

--Ojvind