The EU Tobin tax proposal got unstuck? That's great. This is a small tax on financial transactions - 0.1% on shares and bonds, and 0.01% on derivatives. It's not primarily to raise revenue. It's to kill high-frequency trading and, overall, substantially reduce the amount of unnecessary trading. This should force financial markets to think in terms of longer term goals. (Like a day, rather than a minute, probably.)
Think of it as a tax on zero-sum financial activity.
If the EU does this, the US should. China's government likes the idea and would probably go along; they hate financial volatility. With all the big players on board, the financial system should generate less noise.
"Before the rise of HFT, when old school brokers were the ones doing the market making on the trading floor, the difference between the buy and the sell price was about twenty-five times larger than it is today."
The other thing is that HFT firms make less money all together than Goldman Sachs does on its own:
"From 2011 onwards, HFT has been on the decline. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion. Not only did the trade volume decrease, HFT firms profit has also been diminished since its heyday. In 2009, the entire HFT industry made around $5 billion trading stocks. In 2013, this was around $1.3 billion before expenses. Today, HFT companies seem to disappear just as fast as they appeared. Its most notable case might be that of Goldman Sachs selling its HFT department recently. This department, which it acquired in 2000 for $6.5 billion, yielded them a mere 30 million this present day."
The big investment banks hate HFT firms because they have destroyed their spreads on trades. They push out arguments to get rid of them so they can return too the good old days of making sure they get a cut of each trade.
Who pays the Clintons hundreds of thousands for a 'speech'? The investment banks. Not HFT firms, they make too little money and compete too hard.
No, he's saying HFT are great and should be kept because they are a net gain for society. They lower spreads and take margins away from the huge players. So much so, that the big players are lobbying for taxes like this to make HFT less effective so they can make more money for themselves.
HFT is just another example of software eating the world and doing a job that used to be done by humans more efficiently. This is a good introduction to the mechanics of what HFT is, written by... yummyfajitas on HN I think?
Since shares (and other securities) would be more thinly traded, wouldn't a tax like this significantly reduce overall liquidity and increase volatility?
No, even with HFT the instantaneous liquidity of the market is firmly in the volatile regime, by orders of magnitude. So while HFT adds some liquidity, its very far off from bringing anything like enough to make markets more stable and it does it at the cost of many more destabilizing trades into the system.
If you look at countries such as Kenya which have huge amounts of brokerage fees (2%), which you could model a tobin tax like this on.. they have 2-9% daily swings the average volatility is much, much higher. This goes for similar exchanges with larger fees.. (or larger minimums to exchange financial instruments)
Don't believe me? Look over historical data or even just yesterdays or todays (which I wont be able to see yet when im asleep) gains or loses : https://www.nse.co.ke
Also in case you think its biased against the top or bottom movers, keep in mind there's barely 60 companies listed there.
It might be worth pointing out too, that volatility has increased on italian instruments that bear this tax, not reduced it. It's also made it harder to judge the depth of the market in terms of how much can be sold/bought/raised/invested.
You're assuming this will solve financial volatility: the creation of options, liquidity brokers, HFT a virtual cornucopia of financial products and you think this tax will solve it? It could actually make it worse because it actually removes liquidity from the system..
And if you want an indication of what it could do, have a look over at the italian markets where it has not helped at all. Just recently infact there was a bond issue that was oversubscribed unexpectedly because the trading system gave no indications it could support that, people now actively bypass secondary markets for their main street business.
The tax is even larger than brokerage for shares for retail investors, seriously where will the liquidity come from when its needed?
HFT Doesn't generate any value, it just siphons money to the people who do it.
Stock markets are the original Kickstarter. However with increasing trading frequency you turn something that generates value for society into a grotesque casino.
A very, very large majority of all trading volume is done against HFT market makers. Regardless of the non-HFT trader's motivations, they appear to consistently trade with the HFT market maker over some other participant -- why is that? Even in the case when their motivation is to gamble, why gamble with the HFT as opposed to a non-HFT order?
The vast majority of stock trades are just trades between two parties (neither of which is the company) that believe different things about the stock. I agree that HFT doesn't generate much value, but by this metric, neither do any transactions besides IPOs.
> Think of it as a tax on zero-sum financial activity.
Except market making is not zero sum.
> they hate financial volatility
Why do you think there would be less noise if the actors get higher costs while trying to converge on prices in the massively distributed system that is the global economy? Have you ever run a distributed database of some kind? Have you ever seen what slow network does to the performance of those?
"By 1990, more than 50% of all Swedish trading had moved to London." - Wikipedia. But the Swedish tax was 10x higher and Sweden didn't have large stock markets.
Even more, the EU is taking the American approach to taxing there ("if you're American you're paying, regardless where you're living"):
Banks with headquarters in the EU have to pay the tax, even if the transactions are done in Somalia. Every transaction in European stocks is taxed, even if done in Afghanistan.
"The financial industry" is a very large beast. Even "derivatives" is a very large beast. It makes no sense to go for the industry as a whole when only some section of it was responsible. Mainly mortgage securitisation and distribution. What on earth do guys trading index futures have to do with the crisis? I used to trade listed derivatives, and we never ran into anyone to do with mortgages.
Also, it's worth considering the effects. If you do a FTT, the trading goes elsewhere, or it dies. You won't get nearly as much money as (current size) x (proposed tax rate).
If you want to protect the world from another mortgage meltdown, there are other ways to do that. You could restrict loan-to-value ratios. Or force banks to hold more collateral. These types of things are not unknown.
> The European Commission, the EU’s executive arm, first proposed the tax in 2011 to make sure the industry paid its fair share after the costs borne by taxpayers during the financial crisis.
This sentence in the article makes it sound like they are not specifically going after the causes of the Great Recession, but the finance industry in general, but I'm not sure. In any case, it doesn't seem to be aimed at mortgages at all. Maybe reducing the amount of trading and finance is the point?
They are going for everything and everyone. The hunt for taxes has begun. Of course it's all being trumpeted as "tax the rich" now, but they will come for you, eventually. In fact they already do with negative interest rates, which are essentialy a tax on money.
As the parent points out, capital will just move elsewhere.
why the downvotes? this is exactly happening, at least in EU (taxes on anything considered wealth - cars, properties etc. have you ever heard of any tax rate going down or be abolished, for example property inheritance tax? up to 50% in France for example)
and to some extent to US (ie FATCA double taxation for US expats that don't live in US for years but still hold the passport)
don't know why this is downvoted. guess the average 20-sth hn reader hasn't seen the sun yet. i still remember how we've been brainwashed about the greatness of it all in school.
wake the fuck up, look around you. learn history, look up precedence. my goodness. any uncommon critique is being downvoted by some stupid pseudo-academic click monkey and their entitlement to whitewash history.
Trying to protect against another mortgage meltdown is just ambulance chasing, at current liquidity markets are inherently unstable and highly sensitive to the number of trades[1]. Since HFT artificially drives up the number of trades, but despite this is orders of magnitude away from providing enough instantaneous liquidity, taxing them to death makes sense.
As a side note, after listening to this lecture about the inherent instability of markets, the first guy to ask a question is some sort of trader that wonders if there is any way to make "free money" from the theoretical work presented, shows how social issues is always at the forefront of the financial industry.
Financial firms make profits, which are taxed just like any other firm. Why should they have an extra tax?
Optimal taxation suggests we should tax things that won't vanish when we tax them. Land, for instance. The Swedes did an FTT and found it killed the market, and they had to relent.
Other reasonable taxes are to do with externalities, but this doesn't seem to apply here.
It's not analogous, much of the buying and selling in finance is done for the purpose of the price discovery process, which is to society's benefit, and for which a carmaker analogy doesn't work at all. See any book on market microstructure. If you ignore the price discovery process completely, then, sure, markets become kind of pointless, but that's beside the point. It's not quite like the usual thing of buying or selling a car.
> much of the buying and selling in finance is done for the purpose of the price discovery process, which is to society's benefit,
I'm pretty sure that "most of the buying and selling in finance" happens for making a profit for said buyers and sellers (not that's anything wrong with that), the associated higher liquidity which presumably helps with "price discovery" is only a side-effect. Assuming a transaction tax actually gets implemented prices would still be "discovered" (they've been discovered just fine since we first started trading using shells and the like thousands of years ago), only that the spread would be higher and the liquidity would be lower.
Trading and Exchanges: Market Microstructure for Practitioners. On the lighter side there is https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera... (especially good is its discussion of bucket shops—many swindles that exist today existed back then too). Also, look through Matt Levine's blog to see if he recommends anything. There are also other suggestions here: https://news.ycombinator.com/item?id=1447438 I'd second tptacek's recommendations in that thread, including Shiller's Yale course (it's on youtube).
When a buyer buys a car and plays VAT, the seller gets the VAT they paid on the car refunded. If you do the same with financial transactions, it's essentially adding 0.1% to the capital gains rate. In a sales tax regime, wholesalers are generally exempt from sales tax, as they charge it to the ultimate buyer and remit it to the taxing agency; who is the ultimate buyer of a security?
But this proposal is a transfer tax, as is common for real estate (where transactions are very expensive and slow, prices are opaque, and market makers are few).
A transfer tax would be a drag on everyone who trades in the market, just to punish one demonized industry (HFT); in one fell swoop, everyone's retirement savings, stock based compensation, taxable investments are doing that much worse.
HFT has low barriers to entry, and is intensely competitive, if you want to reduce profit of HFT companies, a better way to do it would be to make it more competitive: reduce the minimum price increment by a factor of ten, and then you'll have firms racing to make a tenth of a penny, instead of racing to make a penny.
I have no idea if it's true, but the argument about extra trades being beneficial is that they make the market more liquid, thus allowing money to flow better where it's "needed".
Interesting time for them to be pushing this, considering the EU thinks it may take business from London due to loss of passporting over Brexit. It could now reverse with firms leaving the EU to avoid the transaction tax.
This is bad news for EU and good news for Singapore, Hong Kong and other more pro-free-market countries. These socialists often forget that there is a global competition between countries for capital and investors.
Financial transaction tax will decrease liquidity, increase spread, increase volatility and decrease volume.
And EU won't going to attract new long term investors either because EU isn't growing at all (thanks to high taxes and excessive regulation). Do you want to buy EURO STOXX 50? I don't.
Can someone explain reasons for not having a FTT? I mean, there is no reason for Company X to move their trading to another country as the (non-hedgefound) owners of it do not gain anything from it. I mean the financial industry does not create any value through high volume trading, so while there is much to gain for the individual, for us as a society there is nothing positive about it at the risk of higher volatility and rapid market reactions. Or to phrase it different: why should I as someone with 100 GE or EADS shares be against a FTT?
The main reason is if you think that the financial industry does create value through high volume trading. If we could all agree that certain issues have no social value it would be easy to build consensus on a tax for them. Unfortunately reasonable people differ on the matter of HFT.
As stated in the article, the intention of the tax seems to be to ensure financial services industry contributes their fair share of tax payers contributions to bailouts. I don't see how this is guaranteed - it seems more likely that costs of doing business will be passed to end users. More likely is a general slowdown of business - maybe that is the goal of the project.
My other comment is a bit of a nitpick. I don't think it good sense to implement a new tax on the basis that you don't see good arguments against. I think rather that you need strong arguments for.
I thought the main reason for it was more regulation of high frequency trading and its adverse effects on market stability. Making money from it is a lower priority, thats what capital tax is for.
> I mean, there is no reason for Company X to move their trading to another country as the (non-hedgefound) owners of it do not gain anything from it
I imagine the tax would be assessed according to the location of the exchange where the trade occurred, not based on the location of the corporate entity. Relocating to a different region would not affect the tax obligation in this case.
> the financial industry does not create any value through high volume trading, so while there is much to gain for the individual, for us as a society there is nothing positive about it at the risk of higher volatility and rapid market reactions
While the financial sector indisputably creates a large amount of value for the economy, a substantial portion of it is reliant on the ability to trade assets with as minimal friction (i.e. time spent seeking a counterparty, the cost of such a search, and the expense involved in transferring the assets) as possible. High volume traders ensure that liquidity is more available in the market. These traders avoid speculating on the long term value of the asset, as they profit from the bid/ask spread (the price to buy or sell the asset). Ideally, this is as small as possible, which is beneficial to the end users of the asset. With smaller spreads, these traders need to perform more transactions to remain profitable.
In general, we'd like markets to incorporate any material information into the price of assets as quickly as possible, since markets are a mechanism for determining value and associated risk of products. This only occurs if trades actually occur, and there are very rarely buyers and sellers meeting at identical times. Market makers stand in the middle ready to ease this friction by acting as counterparty on both sides. Their role ensures liquidity in the market, which helps minimize the impact of any individual trade. By providing liquidity, these high volume traders generally help reduce market volatility.
Ignoring the previous two paragraphs, one can simply ask, "Why do these entities exist if they add no value? Why would financially sophisticated end users tolerate unnecessary leeches on their profit margins?"
> why should I as someone with 100 GE or EADS shares be against a FTT?
As an individual, you likely purchased those shares through you brokerage for a relatively small commission, which you observed, plus the bid/ask spread, which you likely did not observe. If GE's mid-price is $100, its stock may be trading at $90/$110 or $99.99/$100.01. Clearly you, the individual, benefit from the latter pricing versus the former. A financial transaction tax of 0.1% would simply widen $99.99/100.01 to $99.89/$100.11. I assume you may invest your savings or retirement fund in mutual funds, which charge fees on the order of 0.1% to 0.2%. Due to their need to rebalance their holdings frequently, the fee they assess to you will increase, likely by more than the FTT.
Additionally, you, as an individual investor, benefit from the ability of companies to issue dividends and bonds to fund them. The risks (like interest rate fluctuations) to a company taking such actions are often mitigated by derivatives where the bid/ask spread can be as small as 0.002%. A FTT of 0.01% on these transactions would be 5 times the possible profit on these transactions, removing any incentive, or at a minimum increasing the cost, of making them at all.
Thanks, providing constant supply and demand makes sense. On the other hand you only describe consequences of high FTT. If it was something like 0.001 %, it would still disrupt HFT but have almost no effect on my trading!? At least that's what I thought it is supposed to do?
I was addressing your question of how it would affect you, the small, retail investor. Ultimately, any FTT would increase prices of almost every good and service in the economy (oil is traded many times before getting to the pump, debt is perpetually issued to fund capital expenditures, mortgages are resold many times to allocate risk effectively, etc.) You're right in believing that it would disrupt HFT, and that is the intention of the tax. However, my contention is that HFT is, on the whole, beneficial for the financial system, as it improves liquidity and price discovery.
Additionally, 0.001% is still larger than you think it is. 0.01% is a unit called a 'basis point'. Many markets (like interest rates and foreign exchange) operate in fractions of a basis point.
Also, please reread my previous comment more thoroughly. When I refer to market makers, many (especially in equities) are HFT. You, the retail investor, would immediately see the cost of purchasing stocks increase with a FTT. It would also take longer to execute a trade with fewer market makers (the middlemen you are unknowingly trading with) to provide liquidity on the market.
All trading (up to epsilon error) done by retail and institutional investors is with HFT as a counterparty -- disrupting HFT has direct consequences on the bid-ask spread they're capable of maintaining (in the worst case, they'll have to shut off their market making) and consequently affects the cost of trading for all market participants, not just HFT.
The European Union is looking for a way to fill the budget hole that will inevitably appear after Brexit. The current EU budget is set for years 2014-2020 and Great Britain is the third largest net contributor to it, behind only Germany and France.
Fixing the budget may get nasty, since the EU countries may have to increase the contributions or slash the expenses or EU bureaucrats may have to accept a decrease in wages. Net contributors like Germany or France will not want to contribute more, since they have their own problems to solve internally and the nationalist parties are on the rise there (Marie Le Pen and Alternative fur Deutschland). If the budget is decreased it will further alienate the East and South European countries. And euro bureaucrats will not simply accept smaller wages.
Also after Brexit the average EU income will decrease so some regions may no longer qualify for subsidies. Slow economic growth, European banks problems, a migration crisis, Germany's wealth dependency on export that is expected to falter, a conflict with Russia, all this won't help in finding a new, acceptable budget.
In the current situation the EU is ready to embrace any solutions that will increase the budget without causing too much friction within the bloc. FTT seems to meet this goal.
The EU budget is relatively small, at €185 billion. UK's net contribution amounts to £8 billion, a bit, but not earth shattering.
This Tax won't apply to all members, just to the ones that opt-in (Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain seem to be interested). And from what I understand, any revenues steaming from the tax would go to national governments and not the EU budget.
In 2015 the revenue from the UK constituted 15.6% of total EU revenues for that year. It's a significant share.
> ... the tax would go to national governments and not the EU budget.
In 2012 the Commission recommended that two-thirds of the revenues from the FTT should go to the EU budget and the remaining one-third should be retained by the EU Members. It's reasonable to think that at least some portion of this tax will go to the EU budget directly.
Germany doesn't have many internal issues apart from a slow bureaucracy and racism.
The EU certainly has dropped of the radar, even as far as the AfD is concerned and the EU budget isn't really a point of much discussion and has never been one really.
The AfD is also not looking very healthy at the moment. Their actual policies won't win anyone over and their performance in legislature isn't either. Not to mention that they have massive internal issues. They are currently capturing the protest and racist vote but as the other parties adapt and the fantasy they AfD has created comes into contact with reality, they're numbers will crash.
Additionally much of the EU hasn't shown themselves from their best side in the refugee crisis, at least from a German perspective. Germany itself or Schaeuble anyway has also made it a fetish to reduce debt. Any proposals that slashes EU expenses, especially towards Eastern Europe won't get much criticism. Indeed some might very well think that this is a great idea just to remind everyone exactly what the EU has to offer and why Germany has the power it has.
It has huge problems with its exports. Roughly half of its GDP comes from export. And since the 2008 financial crisis that hit other exporting countries so hard, Germany only grew its exports. How's that possible? They started to export more to the UK, Canada and the US. But it seems they are reaching their limit and if the cyclical crisis comes to the US it will really hurt Germany. When half of the country's GDP comes from export, a 10% drop in export leads to 5% drop in GDP.
It also has a banking system, a refugee and rising nationalism problem.
> ... won't get much criticism.
It won't, in Germany. It will in recipients countries.
> ... why Germany has the power it has
Half of Germany's wealth comes from its export. It means it comes from its clients. Germany's economy is dependent on other countries buying their goods. Anything that threatens the free movement of goods is a threat to Germany's well being. Let say, if some country decides to leave the common market and establish trade barriers to protect its national market and then it does well on its own, other countries that currently struggle may follow the suit and protect their producers by blocking German goods. It would be a disaster for Germany.
this is special interest tax with exemption an whatnot. today it'll be a low percentage and limited to certain financial products. tomorrow, i assure you, it'll be everything and the rate will be raised.
does any non-german even know who schäuble really is? do you know he was front and center of the so-called "donation scandal" of his party, the cdu, around 2000? that he "allegedly" reveived 100.000 dm from a german defense industry lobyist? that investigations didn't lead anywhere but nobody knows where the money ended up despite the fact that multiple ppl dealt with the envelope?
there's absolutely nothing great about this union, this country and my fellow countrymen in this regard. things lay clear in front of them and they do shit. only care about soccer, beer and the price of milk.
schäuble is a sick, angry bastard fucking around with his constituency and they don't get it.
Think of it as a tax on zero-sum financial activity.
If the EU does this, the US should. China's government likes the idea and would probably go along; they hate financial volatility. With all the big players on board, the financial system should generate less noise.