Why a Robin Hood tax on filthy rich City types is the very LAST thing needed

The lovely thing about this year's Nobel Prize in Economics is that it entirely borks the case for a Robin Hood Tax - a levy on the financial sector's transactions, in other words. Not that the judging panel's decision will stop efforts to implement the tax; everyone's moved beyond intellectual arguments to instead howl in the …

[alain williams]

Do they know what ''science'' means ?

''The 2013 Sveriges Riksbank Prize in Economic Sciences''

Economics is not a science, the closest that it gets is to be a branch of psychology. In spite of what the egg head bean counters want you to think - you can only make vague predictions and forget the notion of rigorous repeatability.

[Pete 2]

Re: Do they know what ''science'' means ?

> Economics is not a science, the closest that it gets is to be a branch of psychology.

That's probably true, since economics is tightly bound to the motivations people have for doing things - and it's not always about money. And, like any subject that has to add the suffix "science" (just like countries that call themselves "democratic" or "the people's ... "), almost certainly isn't.

However, that doesn't mean it is irrelevant to how we live and has nothing to contribute. Have a read of some of Tim Harford's books: The Undercover Economist being a good start: not only entertaining but easy reading. And if you want to know why oral sex is becoming so popular, read his second paperback, TLoL.

[ Disclaimer: I am not Tim Harford and he is not me ]

[Homer 1]

Credibility: Zero

So, the blogger who gleefully endorsed one of the greatest violations of civil rights in history, PRISM, now celebrates a bunch of narcissistic libertarians winning an award, from the same dubious organisation (founded by an arms dealer dubbed "The Merchant of Death") that awarded a warmonger called Barack Obama a "peace" prize, whilst stigmatising egalitarianism as "theft".

Colour me unimpressed.

[monkeyfish]

Re: Credibility: Zero

What's that got to do with 'Pedantic grammar nazi alert'? Try the sherlock or black helicopters maybe?

[Homer 1]

Re: choice of icon

Well it was the closest visual representation I could find to "I question the author's integrity".

[The Axe]

Re: Credibility: Zero

And it shows that you haven't read the article on PRISM beyond the headline or understood the point.

[Vladimir Plouzhnikov]

Re: Credibility: Zero

http://www.bbc.co.uk/news/business-24508664

This really bugs me off. But Panorama is being so bent here - down to even using pictures of little children playing as they are talking about the treacherous bankers.

However, the interest rate swap is a hedge. That means that if the interest rate in the market goes up, they pay more interest on the loan but the bank pays them the difference on the swap, if the market is going down - the reverse happens: they pay less interest on the loan but have to pay extra to the bank on the swap.

In either case - they get, in total, the interest rate which they have fixed when they've done the swap.

Yes, the bank may not have explained clearly to them how it was supposed to work but they did not lose anything (apart from the additional fees and the small extra margin built into the swap) - it was an opportunity cost. Had the market gone up, they would have been proudly bragging about how clever they were to buy the swap from the bank in the first place.

[Homer 1]

Re: "haven't read the article"

Well, take this juicy morsel, for example:

"This is the first principle of even having a State in the first place: to make sure that the populace is protected from the depredations of the foreigners who would do them harm."

Except the thing that's doing the most harm to the American populace is not some foreign bogeyman, it's their own corporate tyrants and their political lackeys.

Also, surely the point of a (democratic) state is to enact the will of the people, not mindlessly attack anything that's not American. It should be about welfare, not warfare.

Oh wait, I forgot, America isn't a democracy.

[Anonymous Coward]

Re: Credibility: Zero

I vaguely agree with your sentiment, but must point out that, as mentioned in the article, the Economics Nobel is institutionally distinct from the Norwegian Nobel Committee (for the Peace Prize) and the other (Swedish) Nobel Committees for the sciences.

[Homer 1]

Re: institutionally distinct

OK, substitute "from" with "associated with".

Although actually the worst thing about this award is the fact that it exists at all, regardless of who issues it. It's like issuing a prize to those who devise the most effective method of enabling the rich to screw the poor. They should call it the "Bernie Madoff" award.

[Jim 59]

Robin Hood etc

"Robin Hood tax!" is less of a serious strategy, more of an anguished wail from the UK citizenry still denied justice 5 years after the economic crash.

Instead of sackings and imprisonments, it has been business as usual, the same faces still in control, and already repeating their mistakes. Until justice is obtained, and the moral hazard is erased, folks are just not that interested in banks distracting us with pretendy prizes or discussing theories.

News just in - this week's banking scandal - hard sell of so-called "interest rate swaps", http://www.bbc.co.uk/news/business-24508664". Panarama last night...

(I am not disparaging the chaps who won the prize.)

[codejunky]

Re: Robin Hood etc

@ Jim 59

For justice it would be the labour gov at the time in charge of regulating the banks who need to be dealt with. There are a number of people who did illegal activities and some were brought to justice. But when everything crashed there was nobody appointed under labour to blame. Nobody was in any control.

Where was the body to say "oops, my bad"? Where is the body that then said we will put it right? Where is the body that chased down the problems and arrested/turn in the criminals? It didnt exist.

When there is no law there is lawlessness. There was no law. Nobody was enforcing and nobody in charge. First to justice should be labour. Then each cretin who broke the law starting at the top and working down.

[ElectricRook]

Re: Robin Hood etc

The persons who I lay the most blame for the financial crisis are Barney Frank and Chris Dodd. The two Democrat Senators who were in charge of the Senate banking committee. They had a goal of making houses affordable to all, even people who were too irresponsible to be able to buy a house. This caused too much cheap money to go chasing too few houses causing a real estate boom and bust.

The irresponsible people were all trying to "flip" a house, which is the equivalent of taking the rent money to Vegas and double it. But then that is what irresponsible people do.

Playing Robin Hood is what caused the financial crisis of 2008. Playing Robin Hood again will . . . I keep doing the same thing and I keep getting the same results.

[willi0000000]

Re: Robin Hood etc - @ElectrRook

a lot of Republans were responsible for the housing bubble too.

now that we've eliminated each other's ic's lets talk.

the deregulation of much of the financial industry was done on the Republican's watch. they also fought tooth-and-nail to kill and/or cripple the consumer protections so admirably fought for by Elizabeth Warren (now The Honorable Elizabeth Warren, senior Senator from Massachusetts). both actions contributed to the buying spree in housing that was doomed to fail when banks stopped lending based on ability to repay, that a good regulatory system should have stopped, and consumers weren't given good information during the loan process, again a failure to regulate loan documents and insure that both parties know what the terms are.

include the lack of regulation that allowed the banks to create those lovely lumped-together mortgage packages or the lack of oversight that allowed them to be so highly rated and you have the recipe for the disaster that ensued.

Democratic Senators Frank and Dodd may share some of the blame but there is more than enough to spread around with a shovel.

[peter_dtm]

Re: Robin Hood etc @codejunkey

and you also forgot

Where was the process that brought Clinto to book for *persuading* Fany Mae & Freddy Mac into making loans to people who were NOT qualified to borrow a cent; never mind the cost of a house.

And the *regulators* who then allowed garbage mortgages to be wrapped up with good risk ?

The crash started when a numbskull who believed he knew better than everone else & insisted that percieved *racism* rather than proper econmics was the reason poor (non-white) people in the States couldn't get mortgages. The crash simpley prooved just how wrong Clinton (and like minded useful idiots) was about the reason poor people (of every colour) couldn't get mortgages. Economics may be a psuedo science - but I'll take it over wishfull thinking any day of the week.

[lebeau]

Re: Robin Hood etc @codejunkey

Some people observed REAL raciam and classism in the housing system. For example, the Atlanta Journal-Constitution found in 1992 that when white and black people were given the exact same financial records, the blacks who showed up at the loan interviews were 20% less likely than the whites to get the loan. Some people noticed this and tried to take action. The fact that their actions may have been misguided does not disprove their observations.

And I'm not really even ready to give that ground. That banks engaged in what is called on the tech world "embrace, extend, extinguish." The gov extend concessions to the banks to offset the risk of loaning to the unproven. The banks "embraced" these concessions because they were cold hard cash. They then 'extended' these concessions by marketing to those who would never have been denied loans (they would have never applied on their own) and creating more insurance for themselves through MBS'. They then 'extinguished' the push for a more equitable system by robbing the people blind through insider bailouts and blaming the issue on the poor people (who are still poor, or poorer) and distracting the public from those who made billions on the poor decisions of the financially uneducated that were aggravated by professional salesman pitching can't-lose financial bets that the marks didn’t understand.

I'm and salesman (a waiter, actually). I was poor during the bubble. I recognized a scam when I saw it, but many people I know who are financially better off than me were taken. My father, who has been at least upper middle class since I was born, offered to give me the down-payment and to assume all the risk for me if I took an ARM mortgage in 2005. He was sure, on the advice of his financial advisors, etc, that owning property was the key to personal wealth, and wanted that for me. He was fooled, and I wasn't.

To be clear, my father is much smarter and capable of acquiring income than I am. The reason he was fooled and I wasn't was I DON'T TRUST BANKERS AND THEIR OBFUSCATED PSEUDO-SCIENCE OF ECONOMICS. They were trying to loan poor people (me) money. And since I know that banks are dyed-in-the-wool predators, despite what TV, the gov and bloggers tell me, I refused, and my dad is not on the hook for an upside down mortgage. My hypothesis was tested and shown to be correct. That's science, not the hindsight wisdom of 'economics' as it is practiced by our banking institutions and their Central Banking allies.

[c:\boot.ini]

codejunky Re: Robin Hood etc

@ codejunky

You are pretty funny and don't get me wrong, I probably hate the labour party more than you do ... but blaming them for the financial crisis that started out with salesmen selling houses in the US to people who could not afford them in great numbers and banks trading those loans on the stock market is not very fair. Are you Nigel Farage ? Certainly sounds like it, absolutely clueless.

The main problem we face today is the amount of wealth that is transferred from the real economy into the virtual economy (stock markets) and that we never see again because its fruit end up in some tax haven.

The point of the Robin Hood tax is to prevent traders from speculating on some stuff, such as currencies. Look what speculation did to the UK (on currency in the 90's) or Greece and Spain more recently (on debt) ...

You cannot legally charge the CEO's or the traders in person, they are just doing their job and you cannot charge the employer, because it is a bank ... fine a bank and we pay the fine.

Sadly, banks rule the world and you MUST have a bank account.

Lessons?

1. Never work for a quoted company, ever.

2. Never invest in the virtual economy.

3. Ovoid overdrafts and loans at all costs.

Those who do 1 and/or 2 are criminals.

[Vladimir Plouzhnikov]

Re: codejunky Robin Hood etc

"The main problem we face today is the amount of wealth that is transferred from the real economy into the virtual economy (stock markets) and that we never see again because its fruit end up in some tax haven."

Just because you don't understand how something works does not mean that it's "virtual".

And, seriously, claiming that somehow the Greek and Spanish problems were caused by "speculation" is just as daft as saying that rain is caused by open umbrellas.

[codejunky]

Re: codejunky Robin Hood etc

@ c:\boot.ini

"You are pretty funny and don't get me wrong, I probably hate the labour party more than you do ... but blaming them for the financial crisis that started out with salesmen selling houses in the US to people who could not afford them in great numbers and banks trading those loans on the stock market is not very fair."

I dont hate the labour party, the party is made up of a flow of people joining and leaving, it is the last government (blair/brown) I blame, some of which still run the party. It was the US who tanked first but the last gov was dragging us to a crash. The huge financial gap left to us wasnt the US's doing, it was already there. People only noticed when labour couldnt borrow to keep the bribes flowing. As they said- we need cuts that would make thatchers eyes water. The same would have happened had the euro sank (as it has) or we carried on regardless.

"The main problem we face today is the amount of wealth that is transferred from the real economy into the virtual economy (stock markets) and that we never see again because its fruit end up in some tax haven."

Really? Looking just at the UK is this going to make up for voters unwilling to part with their bribes from the previous governments (plural)? Is that going to fix the damage to the economy from green tax and bad energy policy? Will that fix the immigration problem where our borders cannot cope or hope to do their job properly?

There is a simple problem. People want the gov to do what it cannot do-

>People want jobs, but the gov cannot make jobs. Every job in the public sector costs at least that job in the private sector but also costs collective tax to pay for that job (which actually costs more jobs).

>People wont accept failure in the public sector and will complain the gov dont care if they dont do something, so more regulation and time wasting is applied to problems regardless of it fixing any problems.

>But people dont want to pay so much tax, but the gov has to pay all its workers including for the time wasted at the whim of the voter.

So govs borrow too much, make bad decisions and all for winning votes (because that is who we vote for). The global economy collapsed and we could see who was overspending, the others were fine. So much so that germany props up the eurozone. Without the eurozone it would be stronger. The UK is skint and living on borrowed money, as it was through the boom!!!

If this country cannot afford to support itself throughout a boom it cannot possibly support itself through a bust. As a country we are very bad at our finances. There are plenty people exploiting that but it begins at the top and needs to be fixed.

Blaming bankers is weak and lazy. The bankers do what they are allowed and brown was very happy with them. He made no attempt to hide it.

[The Indomitable Gall]

Re: Do they know what ''science'' means ?

Ah, but Alain, didn't you see that word "hypothesis"? Hypotheses are 50% of all science. So economics is science... if you ignore that other 50% that we call "evidence".

So Tim, how can you "bork" or "put the kibosh" on stuff with unproven assertions, which is all an untestable hypothesis ever is?

And what about the rise in microsecond-scale trades we're seeing? Preprogrammed insider information or very reactive algorithms? It doesn't matter -- either way, you can hardly argue that this is an open and equitable system.

[David Cantrell]

Re: Do they know what ''science'' means ?

There are plenty of supposedly hard sciences that are like that. Astrophysics and cosmology. Any biology involving organisms that won't fit in a lab. Climatology. As pointed out in the article, if you're going to accept any of those as having some scientific basis then you need to accept economics too.

[Michael Wojcik]

Re: Do they know what ''science'' means ?

There are plenty of supposedly hard sciences that are like that. Astrophysics and cosmology.

More generally, we recognize that direct experimentation is applicable to some sciences, but is not generally available to others; and that it is not the sole empirical method. Empirical sciences that do not accommodate direct experimentation are built on rigorous and methodologically-sound¹ observation, on formal models (mathematics), and lately on massive computation.²

Economics can be built on those three things. As a science, its two remaining major drawbacks are insufficient engagement with the irrationality of its actors,³ and its lack of predictive power. That last ought to be a caution to anyone seeking to support a claim about policy using economics, but - as we see in this article - it rarely is.

¹In particular, methodologies that are designed to reduce bias and subjective evaluation. There are a number of techniques for promoting those features even when experiments can't be conducted under controlled conditions.

²This last, Ken Wilson's "third leg" of science, is still controversial in some circles, but the considerable successes of computational physics, chemistry, biology, etc over the past few decades is ample evidence that it's both valid and capable of producing results that are not available through other means.

³Behavioral economics is working on addressing that, but there's a very long way to go.

[Anonymous Coward]

Re: Do they know what ''science'' means ?

"Behavioral economics is working on addressing that, but there's a very long way to go"

And therein lies the problem: "working" and "long way to go".

Behavioral economics is a relatively new study field of economics yet any rational person would look at the macroeconomic models and say "But what if Actor [a] does not act as you predict?!". The problem is that economists theorized in a vacuum, lacking the input of the human condition in the equations, for a property that acted based upon the input of...the human condition.

It was arrogant and, we now know, shortsighted. The economists (now, self-admittedly) patted themselves on the back at their brilliance of mapping market actions based on stimulus input, all the while removing human variability from those inputs.

[MonkeyCee]

Re: Do they know what ''science'' means ?

Since I'm studying the damn things, I'll stick my our in and say econometrics is a science, and economics is the creation of models based on that science.

It's often the lack of willingness to change those models that seem to be the problem. A frequent example is about how rational a decision is, when faced with choosing a short term outcome or a greater long term outcome. In theory, the rational choice is the long term payoff, so everyone will do that. In practise, most people prefer short term rewards. If you start plugging in the bias towards immediate results and neglecting long term rewards, then some models collapse in a race to the bottom.

[Sander van der Wal]

Surely, people can lie...

or pretend they know something about the future value of an asset?

The point being, the people who stand no change of having insider information will still act when they see other buy, or sell. Those without info will assume that others have the info, and act in the same way, but a bit later.

Which means that those without info can be manipulated.

Which must mean that markets cannot be efficient.

[Mark 65]

Re: Surely, people can lie...

For the first part Google "the five stages of a bubble". What the author is implying though is that you need to be able to speculate, to take the other side and say "I think that's overpriced shit" and to go short otherwise the market is absent crucial pricing pressure on the other side. Bubbles are human nature though.

[Vladimir Plouzhnikov]

Re: Surely, people can lie...

"Surely, people can lie... or pretend they know something about the future value of an asset?"

Yes, it's happening all the time and it's known as "pump and dump". But FTT is NOT how you solve that problem.

[TheOtherHobbes]

Re: Surely, people can lie...

>Which must mean that markets cannot be efficient.

Or alternatively, that gambling on what other people believe about the future is pure fuckwittery, and one of the most idiotic of all possible ways to make important decisions about resource allocation.

If you want to play on the gee gees or waste your money on roulette, be my guest. But get the fuck out of my economy so I'm not the one who's supposed to pay *your* gambling debts when your stupidity blows up in *your* face.

[James Micallef]

Re: Surely, people can lie...

The point that there needs to be a 'short' option on housing is well made, and clear, but it only shows that more speculation in this particular area would have helped the economy. It doesn't follow that all speculation is always useful, nor does it follow that a tax on financial transactions is harmful to the economy in general.

FTT creates a slight 'drag' in some market sectors, it does not destroy those sectors entirely (as a lack of options to short housing did). If we had a mechanism for shorting 'bubbly' assets plus an FTT we would still have a better market overall than current.

Also one more lesson from the sub-prime clusterf**k is that the more complexity is built in FTs the less well the market functions. Why were so many banks buying the A rated credit default swaps that were completely worthless? There was an active market for them, but their price did not go down to their true value ie zero.

[Anonymous Coward]

Re: "Which must mean that markets cannot be efficient."

Thank you. Finally, logic brought into the eyes of the believers of 'freshwater' economics.

An unregulated market does NOT work. We have 19th century history as proof of this: constant, painful swings of boom and [massive] busts. The question is "Why?" and the answers lie in directions that free market neo-conservatives simply do not want to hear.

Regulations are not created out of the ether. No human says, in front of Parliament or Congress:

"Some time in the future the derivatives market will decide to repackage debts into marketable tranches - the CDO - and we must create a regulatory structure to deal with this potential idea."

This is an impossibility, no human can foresee the future. So regulations - laws - are (over 90%?) created after the fact; laws are mostly created to prevent a situation from reoccurring by establishing acceptable behaviors in an attempt to correct past mistakes.

Knowing this, fully free-market economies do not work because the belief that 'the market will self-correct and punish poor behavior' only happens after the damage to the markets has been done - the fear of penalty is reduced to awaiting the discovery of the market reaction from the results of the action, rather than discovering the action itself. That may seem to be a minor difference but the psychological effect is enormous: the former allows criminals a greater expectation of "getting away with it" because you are examining a more complex system to look for clues...if you are even looking for them in the first place.

Enron, Tyco, HSBC, Barclay's, etc etc etc prove this theory: when operating at a systemic level with lax oversight, the white collar criminal has a great impetus to actions of greed due to the expectation of their misdeeds going unnoticed, as they expect the mass, inertia and complexity of the markets to hide their crimes.

In short, the "free market" movement seems to always discount the factor of HUMAN GREED into their equations - they always forward an agenda of people acting towards each other in perfect harmony, with enlightened interests and self-interest, all working together to advance their wealth. Too bad they live in a fantasy world (then claim that liberals do!) - there are many humans out there who will gladly take advantage of any sliver of opportunity given them, if it means money in their pocket, and the rest of society will pay (sometimes dearly) for their actions. In a non-perfect world we must have regulations to (hopefully) push people to act in socially-acceptable ways - we can hope one day that they will no longer be necessary, but that day is not coming very soon.

[Vladimir Plouzhnikov]

Re: "Which must mean that markets cannot be efficient."

There is only one ethical, moral and reasonable case for existence of market regulation - to make sure that everyone obeys the same set of rules, has equal (proportionate) access and that no single participant can manipulate the market by non-market means or by his dominant position. One may say, there is also a related purpose for the regulation to protect unwary from committing blunders.

However, any regulation that specifically tries to modify the operation of markets to achieve some social or political goal is in itself a manipulation. It is always short-termist, causes unforeseen consequences and leads to politicians attempting to fix the problems it creates by more knee-jerk, short-termist patchwork of regulation. It is a vicious circle.

Unfortunately, whenever the subject of market regulation enters public discussion it *always* becomes dominated by the manipulative portion, the real purpose of regulation is forgotten.

[James Micallef]

Re: "Which must mean that markets cannot be efficient."

This :

"There is only one ethical, moral and reasonable case for existence of market regulation - to make sure that everyone obeys the same set of rules, has equal (proportionate) access and that no single participant can manipulate the market by non-market means or by his dominant position. "

is a ringing endorsement of a FTT on automated transactions

[Vladimir Plouzhnikov]

Re: "Which must mean that markets cannot be efficient."

"is a ringing endorsement of a FTT on automated transactions"

The FTT is supposed to apply to every transaction, automated or not.

[James Micallef]

@Vladimir

You are right, the specific FTT being proposed by the EU is on all transactions, but the concept of FTT in general can be tweaked to hit the sweet spot - tax only those transactions that do not have an added value to the economy.

The articles' author (and, I infer from your posts also yourself - please correct me if I'm wrong) is arguing that any transaction whatever will add value to the economy by adding information into the market, so ANY FTT on ANY transaction is inherently wrong.

My view is that all financial systems are built on 2 core concepts. One is allocation of capital (lending / borrowing part) and the other is sharing risks of private enterprise (companies issuing shares) which then distribute their rewards as dividends. All the rest of trading in already-issued shares, currency and commodity markets and related options, shorts etc, while they DO serve a useful purpose in hedging risk, can be and very frequently are used as speculative tools*.

If these transactions are taxed at a very low level (even as low as 1-10bp), businesses will not stop hedging their risk, but speculators who see their profits slashed will speculate less. It DOES increase businesses' costs (very marginally), but in doing so it provides a more stable environment for doing business with less boom-bust. Banks with big speculative trading desks and those working with zillions of transactions at tiny margins will lose out, but the majority of the economy will benefit.**

*Key point, auto-bots are not used by businesses to hedge their risk and have a more stable outlook, they are used only by big financial services firms purely for the purpose of speculation.

** Just check business growth rates in the 50s-80s when finance was more tightly regulated, and compare how growth rates change as financial services are deregulated in 90s and 00s. Financial Services firms' growth rate far outstrips both the growth rate of other businesses AND the total growth, which means that financial services didn't grow by boosting other business, it grew at the expense of other more productive businesses. Curiously (or not) in parallel with this trend, the rich have been getting richer while the earnings and quality of life of the lower and middle class has flattened out.

[Vladimir Plouzhnikov]

Re: @Vladimir

"All the rest of trading in already-issued shares, currency and commodity markets and related options, shorts etc, while they DO serve a useful purpose in hedging risk, can be and very frequently are used as speculative tools*."

James, you start with a presumption that speculation is in itself undesirable and does not add value to the economy. I disagree strongly.

Almost all economic transactions are speculative. A baker buying flour for his bakery speculates that the demand for bread will sustain the prices high enough for him to make a profit. Investor buying shares in a company speculates that its value will increase over the term of the investment (no matter if he plans to keep the shares for a few seconds or for 20 years).

The only non-speculative (in terms of price risk) transactions are those that reduce your risk (i.e. hedging or liquidation) or those that exploit inefficiencies in the market(s) (i.e. arbitrage). I disregard corruption here, as it is a special case.

Whether a transaction increases your risk (i.e. is speculative) or decreases it (i.e. is a hedge or a liquidation) cannot be determined from looking at that transaction alone. You have to examine the full risk position of the participants. In most cases one side to a transaction will be speculative, the other - a hedge or a liquidation.

The market views of end-buyers and producers will always tend to diverge and it is (one of) the roles of the speculators to bridge the bid/offer spread.

Now, high-frequency trading. I have not yet formed a definite opinion for myself whether its benefits outweigh the drawbacks but I tend to think that they do. The purpose of HFT is determined by its particular algorithm but most will be involved with arbitrage - i.e. exploiting small inefficiencies and imperfections in the market to make almost risk-free returns. There is nothing harmful in that. In fact, this is a vital function because "exploiting" here means "eliminating" these inefficiencies + they create liquidity for other participants.

But this is why HFT is high volume and fast - to take advantage of small imbalances, existing for a short period of time. If you want to speculate - you would hold your position over a longer period, taking risk and then waiting to be proven either right or wrong.

There is a possibility that HFT may try to manipulate the market by artificially distorting one market to momentarily create a spread to exploit but that normally should be impossible because the trade will work against itself (i.e. making buying more expensive and selling cheaper). This can only work, in theory, if you have a leveraged position, say, in OTC market - but OTC markets are not suitable for HFT, so, there...

I have not seen many problems caused by "run-away" HFT algorithms so far. In fact, markets seem to shrug off occasional glitch much quicker and easier than in the old times. The day-traders are the ones that seem to be affected the most by extremely short-term volatility as they are forced to either set the stops wider, which increases the risk, or tolerate them being broken more often, which kills their efficiency.

[Charles 9]

Re: @Vladimir

"There is a possibility that HFT may try to manipulate the market by artificially distorting one market to momentarily create a spread to exploit but that normally should be impossible because the trade will work against itself (i.e. making buying more expensive and selling cheaper). This can only work, in theory, if you have a leveraged position, say, in OTC market - but OTC markets are not suitable for HFT, so, there...

I have not seen many problems caused by "run-away" HFT algorithms so far. In fact, markets seem to shrug off occasional glitch much quicker and easier than in the old times. The day-traders are the ones that seem to be affected the most by extremely short-term volatility as they are forced to either set the stops wider, which increases the risk, or tolerate them being broken more often, which kills their efficiency."

Didn't we just have a "flash crash" recently? It's a sign of volatility, and the spike in volatility we saw can be scary.

The problem is that while the HFT program is trying to seek out these minute differences, so are many other HFT programs, ALL of them trying to be the one to cash in. It's like a little paper bag with only one sweet left in it when ten people happen upon it all at once. Everyone thrusts their hand into the bag at once because they all act at once. Similarly here, the HFT programs can all act at once, creating a spike. Meanwhile, the transactions take time to clear (because of the speed of light if nothing else), so there's a delay between actually making the transaction and getting the result. WITHIN that time period, any number of HFTs could be making the same move, adding to the mess like how fog hides the 20-car pileup and turns it into a 50-car one.

[Vladimir Plouzhnikov]

Re: @Vladimir

Yes there was that. It caused quite a furore among some politicians. Not much more than that, though.

An exchange system crash or a glitch is a more dangerous event and these are happening much more frequently than any HFT-induced "crashes" like the one you mentioned.

And humans (usually drunk) have been causing such things from time to time since when the first market appeared. Here is one of the latest examples I remember very well:

Oil_futures_drunk-trading_incident

No need for a fancy algo - take a broker, give him high-level login credentials for your trading system, get him totally pissed, feel the pain.

Markets are resilient, they recover. Next time (if you survive), avoid doing the same trade or avoid hiring the same guy or stop using a particular algorithm.

[Anonymous Coward]

Re: "Which must mean that markets cannot be efficient."

Sheer bullshit, you make one startling and always false assumption, that the regulation of a market is done in good faith and improves the results of that market. Provably false, the white collar criminal as you describe them, are no match for the authority criminals who regulate in their own self interest.

In short, the "regulation" movement always seems to discount the factor of HUMAN GREED in their reckonings. They assume that regulators act in perfect knowledge and for the general good. Too bad they live in a fantasy world (and then claim that those who believe in free markets do). There are indeed many humans who will take advantage of any sliver of opportunity given them if it means money in their (and their special interest partners) and/or power in thir pocket. And although they will very loudly protest that they do it for others, the public in general pays (sometimes very dearly and with their lives) for their actions. In a non-perfect world, the fewer regulators we have the better, as they never act in socially acceptable ways, instead they warp the meaning of "socially acceptable" into being "bash those who would challenge our power and domination". We may never reach fully free markets, but the closer we get the more chance that we will be rid of those parasites.

And remember, a market isn't a "thing" so much as it is an assemblage of those who participate; by pushing fro free markets, people are actually pushing to free those who participate in them. And that means you and everyone in the world who is part of the market.

[Anonymous Coward]

@AC 19:39, Re: "Which must mean that markets cannot be efficient."

"Sheer bullshit, you make one startling and always false assumption, that the regulation of a market is done in good faith and improves the results of that market. Provably false, the white collar criminal as you describe them, are no match for the authority criminals who regulate in their own self interest."

I'm calling your "bullshit" as bullshit.

Sure, regulation is imperfect but I DARE you to prove that a system with little to lax regulation as EVER worked for the vast majority of people, to create a stable economic environment and sound fiscal policy.

Go ahead. I DARE you. Find the majority of known and respected economists that support the lax oversight theory as plausible and workable in the real world, especially from the [smaller] group of economists left after the housing market collapse that were not humiliated and discounted because of their [failed] belief in said lax oversight.

Wake up. You are living in the past, listening to self-serving talking heads and believing their Kool-Aide while not checking out reality for yourself. Freshwater, laissez faire economics has been discredited and its influence in economic policy greatly discounted. The IMF and the World Bank themselves moved on from hard-core Chicago school of economic thought, especially after the numerous failures in South America and the refusal of several African nations to adhere to the Washington Consensus policies.

[Charles 9]

Re: @AC 19:39, "Which must mean that markets cannot be efficient."

Well, I will call this BS as BS as well. In addition, I will call anything that tries to call me BS is BS as well because I am calling MYSELF BS, and you can't call something BS if it's ALREADY BS, can you? (Joke ends).

But seriously, there's a point to this. While it is true that unregulated markets inevitably lead to corruption (the sharpest image in my mind is the American Guilded Age of the late 19th century), the problem is that, like the greedy investors, regulators are people, too. And unlike the investors, they're in a position of power. Which makes them MORE prone to corruption. IOW, you shift the focus of the corruption from the investor to the regulator. Sure, regulations are all fine and dandy when they first arist, but they're eventually tainted over the years. Look at what's happening with markets today. Everywhere you look, more holes than a wheel of Emmentaler. Because regulators get corrupted and insert the loopholes one at a time in a perverted form of "regulatory creep".

What your back and forth demonstrates is that BOTH sides can be corrupted by greed and that greed is basically going to try to ruin anything society. And the worst part is, greed is inherent to all of us. It's a survival instinct (Thugg wants to get everything he needs to survive, and if it means Ooga doesn't make it, even better). Community usually only works when there's a common threat (that's why wars tend to mobilize people--they present a common threat), but when the threat's over, we turn to the threat within.

I'm perhaps oversimplifying things a lot, but I think my thought process explains why you're both correct. In essense, we can't play fair because, deep down, we DON'T WANT to play fair. It's not the greedy investor or the greedy regulator but the greedy HUMAN. And that makes the whole issue of the rules a "hard" moral problem, because solving it also involves convincing OURSELVES not to cheat.

[NorthernCoder]

What does automated trading add?

"This is as true of my buying some Royal Mail shares as it is of high-frequency trading, algobots, futures, options and all the rest. It is the very fact that people are trading on their knowledge and opinions..."

Algobots != People with knowledge and opinions, so how can they add or improve information?

[T. F. M. Reader]

Re: What does automated trading add?

Algobots are not a self-aware SkyNet, they are created by people with knowledge and opinions, and act upon information distilled from market actions of people with knowledge and opinions. That may include past history (an statistical or other analysis thereof). An algo strategy says, in one way or another, do this or that when such and such condition occurs. This is a coded expression of the algo's creators' opinions regarding the right actions given the information. The algos themselves (or their creators, if you insist) are market participants, and their behaviour can therefore also be observed, taken into account, and exploited.

Now, even a self-aware SkyNet would add information if it traded once you think about it. It may be a source of more useful information than the average human, actually.

Note that in no case a trader's (human or robotic - each category is better at some things and worse at some other things) actions should be assumed to be based on complete or correct information, or on valid opinions. Regardless, the actions carry information that can be exploited. Contrarians are rare, and, as Tim states, sometimes they don't even have instruments to act upon their opinions, whether correct or not, preventing the information from being disseminated and observed. There were a few contrarians (e.g., Mike Burry) who effectively shorted the American real estate market and made a bundle during the crisis. Their opinions and their analyses of the available information were correct, but they had real trouble finding a way to trade on their opinions. [One expects a contrarian in an efficient liquid market to have no problem finding someone to take the other side of the trade.] In the end, they used the much maligned credit derivatives to engineer their trades. If there were more and easier opportunities to short maybe the "bubble" would deflate much sooner (enough people would notice that some are shorting and would start scratching their heads) and with less drastic consequences.

More generally, making trading - acting on the information and opinions - in the market easier is beneficial. Much of the existing regulation is precisely about that. But not all. In particular, taxing transactions makes trading more difficult, just like prohibiting certain means of trading (prohibitions of shorts were common enough in recent years, meaning you were free to provide information to the market by acting on your opinions as long as those opinions were positive...). I think this is what Tim is saying, essentially, though I absolutely do not presume to be his spokesperson or his interpreter.

[Charles 9]

Re: What does automated trading add?

"More generally, making trading - acting on the information and opinions - in the market easier is beneficial. Much of the existing regulation is precisely about that. But not all. In particular, taxing transactions makes trading more difficult, just like prohibiting certain means of trading (prohibitions of shorts were common enough in recent years, meaning you were free to provide information to the market by acting on your opinions as long as those opinions were positive...). I think this is what Tim is saying, essentially, though I absolutely do not presume to be his spokesperson or his interpreter."

But at the same time, it's noted that trading should not be TOO easy. This is especially true with high-frequency traders who act so quickly the human mind cannot keep up. The end result is feedback loops leading to chaotic market swings. The market needs to be able to move, yes, but if it moves TOO much it'll overshoot, and this can be trouble. Think of the market swing like a bungee cord. You don't want it too tight that it jerks you hard and early, but you also don't want it too slack that you hit the ground before the rebound kicks in. Everything in moderation.

[T. F. M. Reader]

Re: What does automated trading add?

HFT is *not* easy - it is damned hard, actually, requires huge investment in capital, technology, logistics, and skills (for uncertain returns). I have no idea what your assertion that HFT (and you don't even qualify) results in "feedback loops" and/or "bungee cord swings" is based upon, it does not even sound plausible (given that HFT typically gets in and out of a small position very very quickly), but let us not go into a debate whether it is its beneficial or detrimental side that is more important - it is completely irrelevant to the topic under discussion. To return to the relevant part, whatever an HFT algo does its existence is detectable, hence provides information, hence can be used, which is all that is being discussed. It's just a trader whose trading exhibits particular characteristics. Note that traders already pay transaction fees (as distinguished from transaction taxes) an those limit their activity very significantly.

And HFT is a very small subset of algorithmic trading, don't interchange the two.

[Charles 9]

Re: What does automated trading add?

Two words: Flash Crash.

There was a swing in the market so alarming that anyone who would've noticed it would've set off alarm bells. Funny thing was, it was over so darn fast that no one really noticed it until AFTER THE FACT. Since it happened too fast for humans to even know it happened, that reduces it to algorithmic trading, and the speed of the activity basically leaves only HFTs as the possible reason.

An analysis later confirmed that what happened were a few HFT programs reacting to each other much like sharks in a feeding frenzy: one sells, another sees this and sells, a third sees them and sells, the first sees everyone else and keeps selling, etc. They reacted against each other, creating the "feedback loop" I mentioned, and since they're designed to be very fast, it all cascaded...and then rebounded, too quickly for anyone to notice while it was going on.

[Vladimir Plouzhnikov]

Re: What does automated trading add?

Yes, in a jittery market, a large player panicked and triggered the sell-off (not HFT), which slurped up all existing liquidity and confused some algos into a futile frenzy among themselves (HFT). Then the exchange's (CME) fault protection kicked in and stopped trading for 5 seconds which brought the algos to their "senses" and the market recovered.

As the result, some stupidity of the algos was highlighted (and presumably have since been dealt with) and another exchange's (NYSE, not CME where the initial sell off happened and fault-protection was triggered) systems inadequacies have been identified and, presumably, have since been dealt with.

[scrubber]

Re: What does automated trading add?

Automated trading allows, among other things, people to buy or sell large amounts of shares at the most efficient prices by spreading trades throughout the day and placing most of them when the volume would be least noticed. It also allows shares to be bought as soon as a pre-chosen price is hit maximising the number bought/sold at that price.

Basically, if I have an automated trading tool it allows me to hide my knowledge about demand/supply of a share from the market as a whole. This is generally beneficial because it allows the share price to reflect the fundamentals of the underlying assets and dividend streams rather than knowledge about what some person is doing. c.f. Gordon Brown (economic genius) informing the markets that he would be selling billions of dollars worth of gold a day before he actually did it, artificially depressing the market price and costing the UK billions of pounds.

[Anonymous Coward 101]

It does not follow that because some undesirable things result from a tax, the tax is therefore wrong. If such a 'Robin Hood Tax' was created, what would be the benefits in terms of revenue raised, and what would be the costs in terms of economic activity that doesn't happen?

[Vladimir Plouzhnikov]

I have a related question

What are the costs and benefits of putting sand into the engine oil as a way of slowing a car down?

[Anonymous Coward]

Re: I have a related question

What are the costs and benefits of putting sand into the engine oil as a way of slowing a car down?

And there we have it, a bad analogy. A bad car analogy even. All sensible debate is now over.

[Anonymous Coward]

Re: I have a related question

It's actually an apposite analogy. I would make the point that a European Commission study reported that an FTT would suppress so much economic activity that other taxes raised by member states as a result of this activity are reduced by more than the FTT raises. And then I would add that this is a prima facie case of damage to Europe's economic engine. But sadly I'm not permitted to do this because apparently all sensible debate is over.

[Zolko]

Re: I have a related question

What are the costs and benefits of putting sand into the engine oil as a way of slowing a car down?

Actually, that's exactly the reason Mr Tobin has proposed this tax: to create friction, to slow down speculation, which has a tendency to overshoot in corrections (because of the sheep-like behaviour of speculators).

Such a tax has the same effect as oil in the dampers: to take away some energy from a system, to allow it to be closer to it's equilibrium at all times, instead of oscillating all the time : boom and bust.

So can you please answer now the following question: what are the cost and benefits of dampers in a car ?

[Vladimir Plouzhnikov]

Re: I have a related question

"Actually, that's exactly the reason Mr Tobin has proposed this tax: to create friction"

I don't know about Mr Tobin, but when I want to create friction while driving my car I do it with the brakes. Much more efficient and does not ruin the engine...

[Tim Worstal]

Re: I have a related question

Err, no.

Tobin wasn't trying to stop overshoots in speculation. Rather, he was in a fixed exchange rate world and he wanted to lower the power the markets had over governments in such a fixed rate world. He was talking purely about FX in a world where FX rates were fixed. That's a very, very, different thing.

Tobin himself towards the end of his life used to get very angry at the people who were asking for a Tobin Tax on all markets. That wasn't his point at all.

[Allan George Dyer]

Re: I have a related question

I have a different related question:

What are the costs and benefits of putting oil into shock absorbers as a way of improving comfort and handling?

[Vladimir Plouzhnikov]

Re: I have a related question

"What are the costs and benefits of putting oil into shock absorbers as a way of improving comfort and handling?"

Oh, here we go - a bad car analogy.... ;-)

There are shock absorbers in the markets already. There are position limits, variable margins, volume limits etc. Those that are meant to limit shocks are limiting shocks - they are not much felt day-to-day but kick-in when something is happening.

The FTT? It is just an increased transaction cost for everyone, for every transaction, every time (with few exceptions) - this is not oil in shock absorbers, it's sand in the motor oil.

FTT is designed to reduce liquidity. Reduced liquidity actually *increases* volatility, by the way...

[JohnMurray]

Re: I have a related question

If you insist on a car analogy:

They're not putting sand into an engine. They're increasing the fuel tax and putting a limiter on the engine.

Hopefully a tracker will be engineered in as well!

[I ain't Spartacus]

If such a 'Robin Hood Tax' was created, what would be the benefits in terms of revenue raised, and what would be the costs in terms of economic activity that doesn't happen?

According to the European Commission, and I'm afraid I can't find the figures easily at the moment, the top end estimate of revenue was €35bn per year. But maybe as little as half that. They've changed their estimates a few times, but I think the Commission's last prediction was that the tax would shrink the Eurozone economy overall. i.e. the tax would make the economy a bit smaller each year, than not doing it. Obviously that has compound effects, so the longer you do it, the worse position you'll be in.

When the Swedes tried this during their financial crisis, their stock market fell off a cliff - something like a 90% loss in transactions from memory. And they were forced to reverse it. But the Euro area is bigger, so that drop shouldn't be as severe. Also the European proposal tries to stop institutions from moving their trades abroad by trying to get other governments to levy the tax and hand it over to them. This is probably illegal, but what they heck, it's worth a try! I can't imagine the US agreeing, the EU could try to force Britain to comply, although that might see us leave the EU before the court case was finished - and the last story I saw had the Commission's own legal advice suggesting it wouldn't pass the ECJ.

Oh and putting a transaction tax on trades in government bonds, would probably have a catastrophic effect on the Eurozone crisis, as it would become more expensive to trade in government debt. Hence interest rates would go up. Which also might see international money staying away, risking re-introducing the funding crisis that could still destroy the Euro. Not a good idea. Spain and Italy are too big to bail out, and the current policy that's maintaining confidence that the European Central Bank will save the day is virtually impossible, as it requires a vote in the Bundestag first, and the Germans don't want it to happen.

Apparently the French and Italian stock markets have lost a lot of trade since they brought in a first stage of the FTT. But the London market has a stamp duty on share transactions, and that's one of the biggest markets in the world, so some sort of transaction tax is perfectly possible. Probably just not in this form, and not raising much cash. In the end, you can't just magic tax cash from people you don't like. The money has to come from someone, so there will always be costs.

[Vladimir Plouzhnikov]

"And there we have it, a bad analogy. A bad car analogy even. All sensible debate is now over."

Eh? What's so bad about this analogy?

[JEDIDIAH]

>> "And there we have it, a bad analogy. A bad car analogy even. All sensible debate is now over."

> Eh? What's so bad about this analogy?

An analogy is supposed to be something like a simile or metaphor where one item relates to another in some way or is similar to the other in some way. It's not just some random rambling that happens to suit your pet political agenda.

Sand in an engine will not slow it down (like a governor or extra cargo), it will destroy it.

The sand remark was pretty retarded really.

[Vladimir Plouzhnikov]

"Sand in an engine will not slow it down (like a governor or extra cargo), it will destroy it."

Wow! You're a genius. At last, some bright soul has got the point!

I was becoming concerned that I was being too technical here and will have to spell it out for the hard of thinking...

[Anonymous Coward]

A question....

....If we have this Robin Hood tax....what impact will it have on those of us who will be relying on a defined contribution pension? I can only assume it will result in higher charges and therefore a lower pension....

[Tim Worstal]

Re: A question....

Yep.

The UK's Stamp Duty has that effect as well. Lowers returns to pensions savers.

[theblackhand]

The likely outcome of a "Robin Hood Tax"?

The most likely outcome is that some countries will sign up to the "Robin Hood Tax" and some won't.

The countries that do implement the tax will see significantly less financial trading as companies move to raise money in other markets. Net outcome for those countries? Tax take will reduce in these countries.

The countries that don't implement a "Robin Hood Tax" will likely see an increase in financial transactions and an increase in tax take through existing taxes. Note that this may not be evenly distributed (i.e. if the EU implement the tax, I am unsure if the UK would get the additional transactions or whether companies would look to distant shores as a safer option in case the UK was to develop stronger ties with the EU rather than the current standoff between the EU and UK over financial regulation).

i.e. the market will adjust to ensure that costs are minimised and profits maximised. Some countries will lose and others will win.

[Anonymous Coward]

Re: The likely outcome of a "Robin Hood Tax"?

> Some countries will lose and others will win.

In the short term, sure. But if those countries which introduce the tax have calmer, more stable stock markets, they could reap the rewards of not experiencing such extreme boom-bust cycles. Nor the unpredictable disruption caused by bugs in, or the chaotic interaction of, automated trading algorithms.

[TopOnePercent]

Re: The likely outcome of a "Robin Hood Tax"?

"In the short term, sure. But if those countries which introduce the tax have calmer, more stable stock markets, they could reap the rewards of not experiencing such extreme boom-bust cycles. Nor the unpredictable disruption caused by bugs in, or the chaotic interaction of, automated trading algorithms."

Unfortunately not. If you remove the speculation you also remove the liquidity, which is what allows you to buy or sell near the market price.

If I have 1000 shares of say RBS to sell, and the market price is 50p, you might expect me to get close to £500 for them. What would happen without the liquidity in the market is I would offer them for sale and there would be no buyers. The price would drop to the level of the first interested buyer. If you were interested in buying my RBS shares but thought as a result of future earnings you would only pay a maximum of 40p, the market for RBS just hit a 20% down swing. Swings are amplified by a lack of liquidity, not reduced by it.

Removing liquidity for anything always causes greater swings in its market price, which is the other problem with housing. You can't readily go short, but if you have gone long then your position is isn't liquid - you can't sell the house and move in say an hour.

Since there are roughly 60 million people long UK housing at any one time, you need to facilitate a speculative market several magnitudes greater to make it liquid and that will absolutely require automated trading, derivatives, and a lot of other stuff the Guardian readers amoung you don't understand and won't like.

[Tim Worstal]

As I said in that published paper

The revenue raised would be negative. Even by the calculations of the EU itself.

One effect of the tax would be that GDP in the future would be around 2% lower than it would have been in the absence of the tax. European economies are, roughly, at the margin 50% tax. Raise GDP by £1 there will be an extra 50p in tax. Lower it and tax collected falls by 50p. So, the revenue loss from the smaller GDP would be 1% of GDP.

Roughly you understand.

The actual revenue from the tax itself is calculated at 0.1% of GDP. Thus the net revenue take is minus 0.9% of GDP.

The costs of economic activity that does not happen is therefore much higher than the revenue, leading to a net revenue loss.

Interestingly, this is all rather based on hte work of Sir John Mirlees, an earlier Nobel Laureate for his work on taxation systems. He is adamant that transaction taxes are really, really, bad taxes.

[JohnMurray]

Re: As I said in that published paper

Maybe it will slow the use of algos' as market-riggers though.

I mean, 10,000 transactions in the final milliseconds of the market......we could do with a spanner in those works!

[John Ruddy]

No surprise that Worst all is being highly selective here.

The Nobel Prize committee is not endorsing this particular research as "right" in the same way it does for other disciplines. After all, a couple of years ago something that is essentially the opposite of this also received the prize.

The Nobel prize for economics is about recognising research that is worthy, not what is right.

[Daren Nestor]

Even Better!

The prize was split - and the researchers are basically diametrically opposed.

Besides, the efficient markets hypothesis is not very popular in academic circles these days. The "father" of it is the only one who publishes in support and even his research makes it look iffy. It's like the theory of rational markets. Unfortunately the markets are not necessarily either efficient or rational!

[Identity]

I agree. The prize went to Joseph Stiglitz in 2001 for showing that markets are inefficient, because both sides of a transaction seldom have the same, complete information. This would seem to be diametrically opposed to the conclusion that Mr. Worstall derives.

[Vladimir Plouzhnikov]

Markets may not be 100% efficient or better say accurate at any given point but it is there is no better alternative. And the more liquid a market is the more efficient it becomes. Consider liquidity as the equivalent of increasing the sampling rate in a digitised signal.

[Graham Cobb]

Time for some damping

I am no economist, but I don't see that the article's conclusion follows from the premise. I am willing to accept that the (pseudo-scientific) consensus is that a complete market, with shorting and speculation, is required for the EMH to work and even that the housing market might work better if that was possible. However, I do not see any consensus that high-frequency trading is required (or even a good idea), nor that a small amount of friction introduced by a tax would seriously damage the EMH. A lot more work would be required to demonstrate either of those propositions.

My gut feel is that modern markets (particularly stock markets and currency markets) are suffering from far too much incentive for both market manipulation and for magnifying small oscillations into larger swings. My control theory course from 30 years ago would suggest to me that a little damping might be a good idea.

[Brewster's Angle Grinder]

Re: Time for some damping

It's a classic. If a needle on a dial is overdamped, it won't reach the correct value before the value changes. If it's underdamped, it reacts to every bit of noise and oscillates wildly, preventing you taking a reading.

I'm sold on the problem with the housing market. But the fact that the dial on the housing market can only swing in one direction, doesn't mean the stock market has the same problem.

[mitch 2]

Re: Time for some damping

Another approach would be rate limiting trading. This could be regulated at exchange level to so many txns per minute or whatever.

[thenim]

Re: Time for some damping

Most exchanges already throttle transactions. I don't see this helping though...

[Tom 7]

Re: Time for some damping

The damping effect of not pissing £420 billion of UK taxpayers money into the system would have been good to see.

[Lars]

Re: Time for some damping

Yes, but I would first of all concentrate on better regulations on the banks and the stock market. More or less every economic crisis so far has been caused by banks and the stock. It could have been avoided. Of course there are those, "one word tells it all" people who would oppose it. Presumably the same people would feel fine (as the free market will fix it) if there was no regulation concerning who can call himself a dentist or a pilot or what can be put in a hamburger. For some odd reason the free market is a bit too good at causing an economic crisis.

[Nick Leaton]

Time for some damping

==========

It's not damping. It's throwing a spanner into the gears. That's what a FTT does.

Consider a clear example. Put a FTT on transactions such as withdrawing cash from an ATM. It fits the Robin Hood tax. Lots of money. Lots of transactions. Lets cream off a quid for each withdrawal, and there is lots of money for governments to spend or give away.

What problems can you see? What effects? I can see lots. But the Robin Hood lot can't. The reason being they want the FTT to apply to other people, and in a way that isn't transparent.

Make the tax transparent and clear for all to see, and it will be seen for what it is, bonkers.

[PerlyKing]

Re: A clear example

"Consider a clear example. Put a FTT on transactions such as withdrawing cash from an ATM [...] Lets cream off a quid for each withdrawal"

Yes, that would be bonkers.

Taking a more reasonable example, let's cream off 1p for each withdrawal. That would slow down HFT but barely be noticed by anyone else.

[Joseph Lord]

@Nick Leaton

It isn't a couple of quid from each withdrawl, it is a penny every few withdrawls. Scale does matter; what might be bonkers at 10%, 1% or even 0.1% may work very nicely at 0.0001% (or at some other figure).

[Anonymous Coward]

Re: @Nick Leaton

" it is a penny every few withdrawls. Scale does matter; what might be bonkers at 10%, 1% or even 0.1% may work very nicely at 0.0001% (or at some other figure)."

You're looking at just a single transaction and seduced by the apparently small value. But it's cumulative through a chain of transactions: your restaurant meal (for example) isn't one transaction, it's the result of a huge number that go on behind the scenes (from buying from a farmer, to importing processed ingredients, to transporting, to paying for the gas to cook them). The FTT hits these up and down the chain, and small numbers multiplied by lots of numbers add up to a big sum. Indeed, that's the point of the tax: it's going to raise billions.

The idea that we're too stupid to notice billions taken from the economy is bullplop. But the idea we're too stupid to work out that it's the Robin Hood gang behind all the prices going up is political genius.

[Joseph Lord]

Re: @Nick Leaton

@AC - 11:45

Taking my 0.0001% figure (I haven't looked in detail at the actual policy proposals) it would take 10,000 transactions in a supply chain before it made 1% of a difference to the cost (assuming all transactions were for the final value of the product). For a complex product like a car that number of transactions being involved is conceivable but the vast majority of them would be for tiny fractions of the total price so the final result would be much smaller. For a restaurant meal there may be hundreds of transactions (again most/all of them for much less than the value of the meal) adding far far less than 1% to the total price, almost certainly less than 0.1% to the price.

Valid concerns would include what the cost of administering such a system would be and determining what was the proper rate for the transaction tax to optimise between limiting harm to normal business and collecting a return and gathering revenue from high frequency, high volume speculative trading.

[Squander Two]

Re: @Nick Leaton

Joseph Lord,

The proponents of the Robin Hood Tax have always claimed that it would raise billions upon billions in revenue. The only way to receive a massive amount of money from a tax is for the people paying the tax to pay a massive amount of money. There is a word for this idea that the taxes will be so tiny at the point of payment that no-one will notice them but so huge at the point of receipt that they'll pay for loads and loads of cool stuff: "magic".

[Anonymous Coward]

Re: @Nick Leaton

"Taking my 0.0001% figure (I haven't looked in detail at the actual policy proposals) it would take 10,000 transactions in a supply chain before it made 1% of a difference to the cost "

You can't have it both ways: it can't raise billions and billions at the same time as having a negligible cost to everyone. The costs are going to be smeared through the economy indiscriminately such that everyone will pay a share of the billions - it is a matter of two sides of an arithmetic equation being balanced (and your lack of imagination about the number of transaction in a supply chain suggests that you will benefit from reading "I pencil")

[James Micallef]

Re: @Nick Leaton

The point of FTTs seems to have been lost at some point in this thread. The proposed tax is on purely financial transactions - buying and selling of financial instruments (bonds, stocks, derivatives, options, currency). It would probably not apply to ATM withdrawals. Maybe it would apply to interest accruals.

It would definitely not apply to either a meal at a restaurant nor the supply chain behind that - that's already covered by VAT

[Roland6]

Re: @Nick Leaton @James Micalief

"The proposed tax is on purely financial transactions - buying and selling of financial instruments "

Is it a tax on the buying or the selling or is it on both?

I ask as currently we pay broker commission/dealing fee's whenever we buy or sell some stock, but only pay stamp duty on the purchase of stock. Hence out of a matched sale and purchase of stock, two lots of broker fee's are incurred but only one lot of stamp duty. I note that currently dealing fee's doesn't seem to attract VAT.

[Richard 12]

It *is* damping

The question is, how much damping is needed?

If too much is applied, the system will never reach the target value.

If too little is applied, the system will oscillate around the target value.

Right now it would appear that the housing market has no way to drive it down, while the other markets have no damping at all - there used to be the simple delays between trades, now with the new methods those delays are gone.

Of course, much of the profits are being made by causing those oscillations, which explains why traders are very much against any form of damping.

So, what is the transfer function for a market?

[euclid]

Re: It *is* damping

If price is "oscillating", then speculators are satisfying real demand at below average prices and real supply at above average prices. So this is beneficial for the non-speculative participants and net negative for the speculators. This is entirely healthy for a market. Price must continually move up and down to find the supply and demand at different prices. It is not designed to converge on a "target value". There is no single price that everybody agrees to.

Taxation of transactions will reduce the volume. This makes each remaining transaction more significant. A thinly traded market is easier to move. If you want a control theory analogy, this is more like reducing the mass of your oscillating object than adding friction. It can actually increase volatility and makes the market more susceptible to manipulation.

[Squander Two]

Nick,

Not a bad example, but it needs some tweaking if you want people to really understand it. Don't just tax people whenever they take money out of an ATM; tax them when they put money into their account too. You give your wife £100? Tax that too. Set up a bank account for your kids and their grandparents put some money into it for their birthdays? Tax that. You receive your pay, which has already had income tax and NI deducted at source? Tax that too, for the transaction of putting it into your bank account.

Since it's very much on-topic here, how about a transaction tax on house sales? You buy a house for £150k, you sell it after a crash for £90k. With any tax on profits, you would rightly pay no tax. With a (say) 0.2% tax on transactions, you'd pay £480 tax, on a £60k loss. That's insane.

It may or may not be correct that banks should pay more tax to pay for the crash -- there's certainly a strong argument that banks who were bailed out should pay that money back to HMT. So tax their profits. What kind of maniac taxes losses?

[Anonymous Coward]

@ Squander Two

"Tax that too" ... some countries have banks which charge for all kinds of things - and those countries (eg NZ) have somehow escaped financial failure /caused by that/. But your example are off topic - no amount of me getting paid or making a gift to some relatives is ever going to crash the economy. If it was, what with me and the rest of the population acting in sync, I might well expect some rules about what I can and can't do.

"How about a transaction tax on house sales" - well, how about one on house purchases instead - e.g. the Stamp Duty? But buying a house is already expensive, even without stamp duty, (what with solicitors and conveyancing etc, so it's unlikely anyone is going to do high frequency house trading anytime soon, even if Stamp Duty was abolished. But then if you put mortgage debt into financial products that could be costlessly traded ... then .. then ... you could do HF house trading, of a sort. I wonder how that would work out?

[Squander Two]

Re: @ Squander Two

Yes, stamp duty is a tax on house purchases. So what? VAT is also a tax on purchases. My point was that a transaction tax is a tax on losses, which goes against all principles of fair taxation. House prices were illustrative, but the same applies in other cases too. How about if your small business fails, leaving you mired in debt, and the government taxes you on the cost of selling off your remaining assets for pennies on the pound? After all, those sales are transactions. Such a measure would probably not crash the economy (though it would stop a lot of people risking starting businesses, I'm sure). Does that make it good? Is that really your only criterion here?

And conveyancing is a cost, not a tax, and every bit as unfair as the cost of buying some petrol in order to go to the shops.

> some countries have banks which charge for all kinds of things - and those countries (eg NZ) have somehow escaped financial failure /caused by that/

Er, yes. Your point? I thought we were talking about tax here.

> But then if you put mortgage debt into financial products that could be costlessly traded ... then .. then ... you could do HF house trading, of a sort. I wonder how that would work out?

Then, suddenly, the valuable market information that house prices are too high would find its way into the market and said prices would crash. The problem was that the information arrived in the market suddenly after being prevented from entering for years. Had the information been reflected in the market all along, prices wouldn't have climbed so high in the first place, so wouldn't have crashed so hard. That's exactly what this research is saying.

I might add that the fact that UK house prices are climbing striaght back up again could be argued to reflect the fact that the cause of the crash was that house prices were too high in the US, not here.

> no amount of me getting paid or making a gift to some relatives is ever going to crash the economy. If it was, what with me and the rest of the population acting in sync, I might well expect some rules about what I can and can't do.

And, according to the Parliamentary Committee on Banking Standards' Fourth Report into the crash (run by MPs, who were all at the front of the queue to blame investment bankers -- so not a whitewash), Northern Rock went bust because it lent too much money to people who couldn't pay it back, HBOS went bust because it lent too much money to people who coudn't pay it back, and RBS went bust because it paid too much for ABN and lent too much money to people who coudn't pay it back. So, according to your reasoning there, we need stricter rules about lending, especially mortgages. Maybe a higher tax on lending. Not a transaction tax on investment banking, since investment banking didn't cause the crash, retail banking did.

[Anonymous Coward]

Re: @ Squander Two says a "transaction tax is a tax on losses"

... no, it's a tax on transactions. These transactions might be profitable, or might be loss making, but the tax mechanism doesn't care.

I don't doubt that a transactor will be more aggrieved by the tax if they make a loss ... but then so might I if I get my vege's home from the supermarket and find they're off, or that my house is now worth less. But that's either poor decision making on my part, or being fooled by a vendor or advisor. I knew the rules to start with: make a transaction, pay a tax. Profit (or a nice home made salad) or loss come /after/ the transaction, and is not the tax's problem.

[Squander Two]

Re: @ Squander Two says a "transaction tax is a tax on losses"

> Profit ... or loss come /after/ the transaction, and is not the tax's problem.

OK, so you would support a transaction tax on your own finances, then? Instead of income tax, you could pay tax on your income and on all your outgoings too. The fact that the outgoings are, well, outgoings, is not the tax's problem, right?

[Anonymous Coward]

Re: @ Squander Two says a "transaction tax is a tax on losses"

"you could pay tax on your income and on all your outgoings too"

I kind of do already. I pay income tax, and almost every time I buy something I get hit by VAT. I suppose it might be annoying if I was always transferring money to various relatives and passers by, but that's pretty rare. And VAT (20%) is a lot higher than the micro-level (<1%) taxes proposed for FTT's. If tax law hit me for 0.1% every time I paid a credit card bill (my main non-VAT-able money outgoing), but also everyone (bankers and speculators included) else the same on money transfers, I reckon I could live with that.

[firefoxx]

Re: @ Squander Two

Absolutely right - posters please note that all of the trouble was caused by retail banking (RBS, Northern Rock, Lloyds / HBOS).

There were *no* investment banks which went bust and were bailed out by government.

(If you think I'm wrong, then please name them).

[T. F. M. Reader]

Re: @ Squander Two

"But then if you put mortgage debt into financial products that could be costlessly traded ... then .. then ... you could do HF house trading, of a sort. I wonder how that would work out?"

Mortgage debt *was* put into financial products (in the US, at least) about 30 or 35 years ago, initially by Salomon Bros. It did not result in any noticeable HFT, but it did make mortgage debt tradable. As one of many effects it allowed investors to spread and hedge their risks which overall made mortgages cheaper, which was a Good Thing(TM).

As any good thing it can be misused and/or abused, but in general liquidity is good and restrictions are bad. The obvious rule that one should not invest in what one does not understand is all too frequently neglected, causing (generally well-meaning but at times power-hungry) bureaucrats to over-regulate "to protect the innocent" (read: those who stupidly invest, sometimes others' money, in things they don't understand), which prevents people from acting in the market whether they are stupid or smart, which causes problems that are noticed too late.

Smart people then invent new and more complex ways to work around the regulations because they want to take action they deem correct. The new and complex instruments are legal, they are also difficult to understand which never stops stupid investors, and there are enough unscrupulous bastards (this is not to say they are the majority) who will exploit the situation.

[JohnMurray]

HMG didn't give them the money, or lend it to them, they bought-back their own bonds.

[bencurthoys]

I do pay £1 or more to take cash out of an ATM, unless I walk well out of my way to a free one.

If I want to pay cash or cheques into my Barclays business account then the bank will charge me 1.5%, on top of my costs of securely transporting any cash to the bank.

If I want to take credit card payments online then between the payment gateway and the credit card company I'll be paying about 1.5-3% + 20p per transaction.

All of these payments - including cash, which is largely perceived to be "free" - have frictional costs from the business's point of view, and we seem to cope with that ok.

If VISA can charge 2% for providing the infrastructure that makes credit card payments possible - servers and security and communications and so on - then why can't the government charge for making currency possible - the rule of law, the royal mint, trust in the pound as a medium of exchange?

[Squander Two]

bencurthoys,

Yes, businesses charge money for services, which includes ATMs. But what you're saying here is that, if it's OK for a business to charge money, it must therefore be OK for the Treasury to charge that same amount in tax. But it's not, because taxes have the concept of fairness tied up in them, which is vital since they're operated by a monopoly -- the public and electoral pressure to keep taxes fair is the only version of competition they're exposed to. Going bankrupt costs money too: you have to pay a solicitor and so on. Does that mean it's OK for the state to tax bankruptcy?

And are you seriously under the impression that the state doesn't already charge us for the things it does?

[JohnMurray]

http://en.wikipedia.org/wiki/Fractional_reserve_banking

[Vladimir Plouzhnikov]

@JohnMurray

Fractional_reserve_banking what? Do you propose full reserve banking instead? How is it going to work? Please explain.

[fajensen]

I fail to see the argument: The Banks, in fact, creams off a charge from every cash withdrawal, The credit card companies cream off several percent from every transaction, even MORE if the card is used for cash. So, yup, the bad effects, whatever they are, should be plentiful now, should they not?

IF one want to argue against the FTT, a proper argument might be:

"So, What about the unregulated financial markets?" The unregulated markets are valued at, according to ISDA, about 60x world GDP. The FTT would just drive the rest of the trade into the unregulated markets, no rules, no public prices, closed club -> no taxes need to be applied, therefore - as long as unregulated markets exists - FTT is Bad and "bonkers".

and

"What about the blatant corruption in the finance business - wouldn't traders just churn clients portfolios all the way to Zero to show their anger at the FTT?" Of Course They Would - and since bankers cannot go to jail, FTT is Bad & Bonkers.

There, fixed it for you!

[Tromos]

Opposite of Robin Hood

Cream off a quid for each withdrawal.

The rich guy will just pull out the max amount and have a bulging wallet. This will last for ages as he rarely pays cash for anything anyway. The not so well off are the people who typically take out twenty quid to keep them going a day or two. They are the ones who would be hammered by this. Not exactly Robin Hood.

[Anonymous Coward]

@Nick Leaton

Sorry, Nick Leaton, but I cannot see how "withdrawing cash from an ATM" has anything to do with this. The banks would love it but only if every bank did it. It could very well happen but that has nothing to do with Robin Hood.

[davemcwish]

Purpose?

You state that "Central to the Robin Hood folks' logic is that there's such a thing as too much financial speculation."

It is mentioned but on looking at the Robin Hood Tax website it's clear to me that this is just a tax raising measure due to:-

"The financial sector is responsible for a big part of the mess we're in. So our merry band of hundreds of thousands of Robin Hood supporters believe that banks, hedge funds and the rest of the sector should pay their fair share to clear up the mess they helped create."

In other words, those groups are making too much profit and we want some of it. I'll skip ofer the fact that they seem to have forgotten that poor regulation was also a contributer.

This site mentions a load of 'worthy causes' but we all know what happens when governments get their hands on other peoples money...

[Vladimir Plouzhnikov]

Re: Purpose?

"In other words, those groups are making too much profit and we want some of it."

Well, then tax the profits. Increasing transaction costs is not the same.

[Gio Ciampa]

Re: Purpose?

Tax the profits????

Watch them magically disappear...

[Tim Worstal]

Re: Purpose?

As soon as you start reading their background papers their reasoning becomes more clear. Believe me, it's in there that too much trading is a bad thing.

[Anonymous Coward]

Shiller - quite!

I don't understand why these transactions aren't liable for VAT - most other services are, and the institutions aren't doing this as some sort of public service, they are there to make money on these deals. The principle of taxes on purely financial transactions is there (in the UK, savings tax, capital gains tax, stamp duty etc). Another way of seeing it is as a recompense to the state for the money it expends on securing the infrastructure that allows this financial world to exist, like road taxes or tolls.

[Vladimir Plouzhnikov]

Re: Shiller - quite!

VAT is a "Value Added Tax". When you trade stocks or commodities you don't *add* (or detract) value - you trade *at* value, whatever that value is at the time of your trade.

Your broker/bank though will pay VAT on the commission it charged you, because it provided you with a service, which created a taxable value.

[Mark 65]

Re: Shiller - quite!

If you want your pension pot paying out VAT on every transaction then go for it mate but that's some hurdle rate you'll be setting yourself for having a pot to piss in when you retire.

[I ain't Spartacus]

Re: Shiller - quite!

Anon,

You don't understand VAT. Business don't pay it. I charge VAT on our invoices, and give it to the government. But first I claim back all the VAT on our purchases, and offset it from this, and that's what the government gets. The companies that buy from us do the same. The only people who pay VAT are the consumers - who get 20% added to their bill at the end of the transaction chain. And companies too small to claim it back of course, but they don't charge it, so get to be cheaper than us or keep the difference - and therefore aren't effectively paying it either.

So if we had VAT on the shares in my pension, let's say the company running it for me bought and sold a share every 5 years. That would mean that my first year's contribution made at 20, would by the time I'm 60 have gone through 8 VAT rateable transactions, at 20% each. That's killed pensions as a viable investment, well done...

[Tim Worstal]

Re: Shiller - quite!

Re VAT. Financial transactions are outside VAT, this is true. And there have been suggestions to bring them inside it. The problem with this is that they would then be able to reclaim the VAT on their inputs. And the general feeling is (although I've not seen or done the calculations myself) that this would result in negative revenue collected.

And of course it would be interesting to see the reaction people have to paying VAT on their mortgage interest....

[Roland6]

Re: Shiller - quite!

>able to reclaim the VAT on their inputs.

Wel we can take some comfort in the fact they are at least paying the VAT on their lunch bill's...

[Miek]

"Why a Robin Hood tax on filthy rich City types is the very LAST thing needed" -- Indeed, I guess what is needed is to simply tax us mere "Citizens" a little harder in order to support the poor investments, decisions our Business overlords make not to mention the insignificant tax revenues they generate for the Country.

[Anonymous Coward]

But, but ... think of all the spending those virtually untaxed individuals do, thereby propping up the economy for the rest of us. How else are all those poorly made Ferraris, overpriced terraces in Notting Hill and shit artworks going to be sold?

[Miek]

"But, but ... think of all the spending those virtually untaxed individuals do" -- Well, If I was taxed less, personally I would have more money to just waste on frivolous pursuits such as fast cars.

[Fading]

Simple mathematics

If you take from the rich you make them into poor people. If you take from the poor they are still poor and there's so many more of them to take from. Ergo take from the poor and give to the rich for perpetual economic good times......

[I ain't Spartacus]

You do realise that a majority of all the income tax paid in this country is by 'the rich'. Things would be even fairer if we ditched National Insurance and merged it back into income tax - and more efficient too. Though that might upset the IR35 brigade, as you can avoid most national insurance by working through a company.

Even VAT isn't as regressive as many people say in the UK. Because it's not charged on food, children's clothes, housing, insurance - and at a reduced rate on energy.

Anyway, the FTT wouldn't be paid by filthy rich City Types. For that you want high top rates of income tax, or bonus taxes of something. The transaction costs are paid by the customers, so it would be pension funds and people holding stocks - and that means ordinary investors and anyone with a pension.

[Anonymous Coward]

Hows about...

Not having 'derivatives' and other such products based on the housing market. Banks should not be able to sell off their liabilities so easily. Then they may take a bit more interest in the whole process.

[Measurer]

Inverse lottery?

Rather than a globally applied tax on all transactions, why not a tax lottery where companies which achieve a better than X yearly profit (plus any other metrics which may be relevant like Return on Investment ratio etc.), qualify to enter the lottery and therefore MAY have to pay a windfall tax. The proportion of the 'winning' companies profit which goes to tax, and the spread of 'winners' can be adjusted exactly like the regular lottery to achieve a target revenue. If the tax applied to a company in the previous year causes undue financial difficulties in the next, then there can be an appeals procedure.

[conel]

Asymetric Speculation

From the article is seems that the "Noble" winners are suggesting that the issue with the US housing market was asymmetric speculation, as in lots of people going long and not enough people going short (of course Goldman et al were going short but few people knew).

The suggestion isn't that there wasn't enough speculation but that the speculation was unbalanced due to the nature of the market. To use this to suggest that all speculation is great and that there is a "scientific" consensus that the more speculation there is the better is just plain silly, even if you pretend that economics is a science.

The article reeks of ideology as opposed to clear thinking.

[Vladimir Plouzhnikov]

Re: Asymetric Speculation

FTT assumes that *all* trading is speculative and therefore punishable. It's the Soviet mentality where the State thinks it knows best what should cost what.

There are plenty of methods which exchanges do use all the time to manage speculation levels.

[david 12]

Re: Asymetric Speculation

Even if FTT is the only suggested solution (it's not), it does not "assume", anything (it's a tax), and only some of it's supporters assume anything like your suggestion that *all* trading is speculative and therefore punishable.

You will notice support on this board from people who have some knowledge of basic control theory. For reasons that should be obvious, there is going to be very little overlap between that group and those that think *all* regulation is bad and therefore punishable.

[Vladimir Plouzhnikov]

Re: Asymetric Speculation

"Even if FTT is the only suggested solution (it's not), it does not "assume", anything (it's a tax)"

OK, sorry, I apologise profusely. It is the people who propose the FTT who assume it. I stand corrected.

[Zolko]

Re: Asymetric Speculation

"FTT assumes that *all* trading is speculative and therefore punishable."

no, quite the opposite: FTT says that long-term investments won't feel the pain of a 0.1% tax, as they are in the business for at least 10% or 20% return, but high-frequency short-term speculations which are in for every fraction of % will loose if their margin is less than that. An FTT wants to limit transactions with tiny margins, that's all.

[Lars]

Re: Asymetric Speculation

"There are plenty of methods". Those methods have failed for many banks, or should I say bank customers.

[Vladimir Plouzhnikov]

Re: Asymetric Speculation

No, you're wrong. They worked very well - there were no market failures. I am not aware of any regulated exchange failure in any non-mickey mouse jurisdiction in recent time, crises or no crises.

You confuse market regulation with internal controls in the banks. Those latter did fail in many instances but no amount of tax will fix that. No restriction on automated trading, either. If you look carefully, all failures were caused by humans and they were happening just as easily before the trading even become electronic, let alone automated.

Most of you are barking at the wrong tree here.

[fandom]

Going short and long

It wasn't that hard to go long or short in housing, you could use homebuilders stock to do it, I bet there is even an ETF, or two, that covers them, or you could use Fannie and Freddie stock

Another way to go long was investing in mortgage backed securities which were quite popular since they were triple A, shorting them was harder but Paulson managed to do it and made billions, which he then insisted on losing betting on gold.

[Mark 65]

Re: Going short and long

"It wasn't that hard to go long or short in housing, you could use homebuilders stock to do it"

Errr, no. That's like investing in gold miners as a proxy for the metal itself - generally a piss poor idea.

[david 12]

Re: Going short and long

Yes, an enormous amount of money is speculated on Gold Mining companies as a proxy for the metal itself. I'm not sure why you think this is a bad idea? It is more leveraged (mining stocks swing farther than the gold price). Are you trying to say that leveraged speculation is a piss poor idea?

[Anonymous Coward]

Re: Going short and long

It's a piss poor idea because gold mining is as much a play on energy prices as gold prices. There's a value to the stock of the gold in the ground, and the cost of extracting it is both a huge fraction of the value of the gold and a very energy intensive process. Worse, if the gold falls below a certain threshold then a particular miner is non-profitable and the value of their stock goes to zero (unlike the price of gold).

[PerlyKing]

HFT?

I don't follow the logic of your argument here. You appear to be saying that given the assumption that we need a mechanism to enable the short-selling of property, therefore all speculation is good and any tax on transactions would be bad.

While the first part makes sense to me I don't understand how this justifies high frequency trading, which seems to be designed to make money only for the very well funded companies which can indulge in such activities.

I'm afraid that I'm not willing to pay to read the full text of your own paper, but the example cited in that House of Lords paper appears to relate to what I would call "proper" transactions: a supply chain of companies buying things in order to make products. I can understand that a tax which was too onerous would hurt them. But what about a tiny tax which would allow reasonable speculation but slow down high frequency trading?

To put it another way, what's wrong with this article? http://www.davidbrin.com/transactionfee.html. That also cites a Nobel laureate, but on the other side of the argument :-)

[David Pollard]

Re: HFT?

There's a fine animation which shows the effects of high frequency trading during five years of American trading here:

http://www.motherjones.com/kevin-drum/2012/08/chart-day-algobot-wars-now-rule-wall-street

It looks to me as though the algobots take rather a lot from the market, presumably at the expense of 'ordinary' investors.

[Velv]

Missing the point of the FTT

An FTT is not being introduced to reduce speculation.

It's not being introduced to balance the market.

It''s not being introduced to out dampers in the market.

It's not being introduced to raise revenue and protections against future market changes.

It's being introduced to make poor people believe their governments are doing something about those rich bankers. In other words, to win votes.

[Anonymous Coward]

Re: Missing the point of the FTT

and in other news rent-seekers like seeking rent.

[Anonymous Coward]

Re: Missing the point of the FTT "It's not being "

Maybe I don't care about the motives for a FTT tax. Maybe I care about the likely effects, and have reasoned that it might reduce gratuitous speculation and/or balance the market, and/or damp down market swings, and/or $OTHERGOODTHINGS.

[Wolfclaw]

Yes We Do !

It's these city idiots and government accountants, yes Osborne and Brown, I'm looking at you, that caused all the crap we are in now !

[I ain't Spartacus]

Re: Yes We Do !

What about the people that bought houses they couldn't afford, and lied about their incomes?

Or the people who ran up £10k credit card debts they couldn't pay for.

I didn't buy a house in the boom, because I couldn't afford it. I might have made a huge profit, and be really happy now, but had the bust come a couple of years earlier, I'd have been doomed. So I had to save a deposit for a few more years until I could make a sensible purchase. I'm now covered if the market drops further, which it probably won't - unlike the people I bought off - who got greedy, bought what they couldn't afford and ended up losing over 30% of their money. Well as it happens, mostly someone else's money, but they lost whatever deposit they had too. And the building society in question deserved it for overvaluing the place so badly.

In fact, what about the voters who kept voting Labour because they were spending loads of money and not raising the same in tax? Are they not also partly responsible for the government deficit? It's not all the politicians' fault if some of them were opposed to it, but people voted for the other lot.

There's lots of blame to go around. The banks, governments and politicians failed, but then so did the voters. Also, seems a bit hard to blame Osborne. He had never been in government when this whole lot hit. Obviously you can blame him for whatever mistakes you think he's made since taking over.

[Lars]

Re: Yes We Do !

"What about the people that bought houses they couldn't afford, and lied about their incomes?" I think we should look at the American market here. The "banks" where pushing money to those wanting to by a house. They knew very well that very many had no chance of paying the loans. This is well documented in the USA. That did not stop the #banks" as they knew they where able to sell those loans to other "banks" (a lot to London) and avoid their own risk. This was fraud from the very beginning. It is, of course, easy to blame those buying the houses, backed up by the American dream, expressed by Bush on TV. Bush was probably completely unaware of what was going one in the background. Anyway, as you know, the house is still the property of the money lender until it is paid. In other words "banks" decided to bye houses well aware of the risks relying on their ability to sell the shit to somebody else. Call this what ever you like, fraud, stupidity or greed. I would still blame the "banks". You can educate people but to deal with banks you have to write the rules.

As for "the people who ran up £10k credit card debts" they probably destroyed their economy for some time but they did not cause the melt down.

[Whitter]

A sick market needs some medicine

I've always thought that we should slow down the buy/sell system to allow some rationality back in. However, how to do so in our madcap multi-company, multi-financial market world?

My initial stab would be that if you buy a share in stock "X", you can't sell any shares in "X" for a period of time: enough time that you should have truly analysed the stock in question before making such choices.

I'm assuming a simple rule will be gamed almost immediately - and that's one of the main problems: the stock market has become a gamed system through hand through - so much so that large companies make deliberate buy/sell patterns in the hope of triggering automatic algorithms in the competitors to do silly things. What value does that have to the companies who's shares are the exploit tool of such behaviour?

[Squander Two]

Re: A sick market needs some medicine

So, your pension fund buys some shares in Company A. Three days later, a whistleblower inside Company A reveals that they've been using some accounting shenanigans to portray their value as far greater than their real value. Everyone in the world with any sense immediately sells off their shares in Company A, selling them at a loss, yes, but not as great a loss as if they hang on to them for a while. But not your pension fund. They now know they're holding junk stock that might well be worthless inside a week, but the law says they have to keep hold of it for a month before selling it on. Goodbye, your pension.

[Anonymous Coward]

Re: shenanigans => Goodbye, your pension.

Well, goodbye some tiny fraction of your pension, I would hope. Pension funds shouldn't be putting all their eggs in one basket. An you propose a relatively unlikely scenario - buying just before the bad news. More likely, with a long-term strategy, they'll have bought months or years before.

So, you propose a risk to a small fraction of my pension, and one that in fact is rather unlikely to be affected by such unfortunately timed circumstances. How does that become the apocalyptic "Goodbye, my pension"?

[Squander Two]

Re: shenanigans => Goodbye, your pension.

Because that was just an illustrative example. There are of course thousands of different types of news that can break that can cause the value of a company to change; a whistleblower is just one. And, contrary to your claim that this is incredibly rare, news breaks every single day that various investments are worth more or less than people thought they were. This is precisely why prices fluctuate constantly. And, considering that price fluctuations are completely normal and constant across every investment in the world, the idea that a pension fund wouldn't be much affected by them because it has lots of different investments and a long-term strategy is farcical.

[Vladimir Plouzhnikov]

Re: shenanigans => Goodbye, your pension.

He will have to forget about having a pension in the first place - his fund won't be able to even enter the market because there will be no liquidity...

[teebie]

"But this Nobel prize-giving suggests the scientific consensus is that this idea is wrong."

Given who is giving the prize it really doesn't.

The stock market doesn't reflect real worth because the majority of trades are made by institutional traders, who aren't playing with their own money, leading to incentives that tend to cause bubbles (cf Nate Silver). Having stock prices that reflect the companies' worth is better for the man on the street, because their actual money is less likely to be lost to gambling, hype and the snake oil market.

Fees slow the market (currently: if you trade too much too frequently you have too often fees will wipe out any profit). And nothing suggested by the article would have solved the causes of the housing bubble - giving mortgages to people who couldn't afford to pay them back and marking financial products based on these mortages as safe despite no knowlege about what they were or how likely they were to fail.

"The award of a Nobel is as close as we get to an affirmation that this is the scientific consensus"

Peer review by scientists probably carries more weight than a prize awarded by a bank.

[Squander Two]

"The stock market doesn't reflect real worth"

What is this "real worth" of which you speak? An investment's "real worth" is apparently not related to the price people are willing to pay for it. OK, so how would you go about calculating it, based on what information?

[teebie]

Re: "The stock market doesn't reflect real worth"

Earnings

[Eclectic Man]

Let's think aout this

Firstly, the article ignores something very important about houses: PEOPLE LIVE IN THEM. they are not financial toys purely for investment and financial gain. They require such things as maintenance and the dollar value of a house or home can change depending on the location (as the journalist said "when the Taliban move in next door, there goes the neighbourhood).

Secondly, the article completely ignores the idea of the value of a share being in any way linked to the payable dividend. It only mentions the price of the share for sale. (The word "dividend" does not appear in the artcile.)

Thirdly, share trading is protected physically and in other ways by public servants, and publically funded infrastructure. The only legitimate reason for such activity to be untaxed is that it is of such overwhelming benefit to sociatey that we are happy not to proivde taxes to pay for things like social servcices able to protect the vulnerable, weak, poor etc. in our society. I.e. it is on the same ethical level as charities and religious bodies (historically religious organisations performed many charitable acts).

So please, lets think about more than just the share price when discussing this idea of a FTT, it is a lot more compliacted than the author describes.

[Boris the Cockroach]

I always

thought the idea of the futures market was that the producer could get a stable price and a customer for his stuff and the consumer would get a stable price and delivery.

Eg Farmer John contracts to sell 1000 tons of wheat to bingo bakery at £10/ton on Sept 10th

So the easiest way to reform the futures market and to drive out the speculators would be to only allow traders into the market who can actually take physical delivery or supply the stuff in question.

So mad trader John would have to buy a storage depot for 100 000 tons of oil if that was the amount of oil he wanted to sign a futures contract for.

And remember when oil spiked to $180/barrel... there was no supply side problem that ment there was any less oil being delivered than 6 months previously... when the price was $70

[Vladimir Plouzhnikov]

Re: I always

"So the easiest way to reform the futures market and to drive out the speculators would be to only allow traders into the market who can actually take physical delivery or supply the stuff in question."

All you'll do is kill the liquidity in the market, so that the farmer John won't be able to sell his wheat for future delivery and so hedge his price risk.

"So mad trader John would have to buy a storage depot for 100 000 tons of oil if that was the amount of oil he wanted to sign a futures contract for."

And the refiner won't be able to hedge the price of his monthly feedstock purchase program without building an insanely large tank farm, which will stay empty most of the time (because that's the reason for buying with *future* delivery - so that you don't have to buy now and store it yourself :-) ). Who will pay for that? You, of course.

"And remember when oil spiked to $180/barrel... there was no supply side problem that ment there was any less oil being delivered than 6 months previously... when the price was $70"

You mean $150/bbl... That was in the WTI market, where you *must* make or take physical delivery if you keep your position open until the final settlement.

[fajensen]

Re: I always

I disagree. The regulated, public, markets actually work pretty well at their primary function of mediating between buyers and sellers.

The markets that do not work (except to perpetuate fraud and instability) are the Unregulated Markets.

The financial reform needed is basically something that will force trade back into the regulated markets again; Going from "mild" we could start with, "not being able to use OTC paper as collateral for loans", all the way to the perhaps more satisfying "giving OTC traders a trip to the organ donation center"!

The EU has raised an anti-trust suit against CDS in the OTC/Unregulated Markets, claiming that these markets are closed to competition and therefore hindering the free flow of trade & service within the EU.

That may have a lot of teeth and the setup is deliberate, I think: Anti-trust charges bypasses completely the (presumably corrupt/incompetent) authorities that were supposed to regulate the financial industry but didn't and the EF-court have always decided in the favor of More Competition, even against nation states.

This will be interesting. '

http://www.nakedcapitalism.com/2013/07/eu-antitrust-authorities-sue-13-megabanks-over-credit-default-swaps-collusion-to-stymie-exchanges.html

[Squander Two]

Re: I always

There is a huge problem with the theory that the crash was caused by CDSs: after the crash, the CDS market grew. Yes, people sometimes mistakenly trade in goods where the risk isn't worth the reward, but not immediately after it has been demonstrated to them that the risk isn't worth the reward. If CDSs had caused the crash, they'd have been treated as poison immediately afterwards. Instead, investors flocked to them.

[Vladimir Plouzhnikov]

Re: I always

I personally agree that regulated markets - aka exchanges - work best and would like to see the use of OTC instruments discouraged as much as possible.

But there are two reasons for moving OTC swaps like CDS to regulated platforms. One is transparency, discovery and protection from manipulation. The other is credit risk.

Regulated exchanges have developed a system which handles the credit risk very well through the use of central counterparty - clearing houses.

Using CDS as an example - the swaps themselves were not the problem. They worked OK as long as your swap counterparty remained solvent. However, if one of them went bust that could and did trigger a chain reaction. Basically, if you rely on your insurance and your house is swept away by a flood and you then find out that your insurer is bankrupt - that's bad news not only for you but for your bank as well, etc etc.

Clearing system handles such issues pretty well - there were no exchange failures in the recent history, even with the huge market swings that were seen during the crises - not in financials, not in commodities. Even bankruptcies of major individual clearing members were absorbed with tolerably low disruption.

[Hull]

Avoiding market correction fallout

I understood that these theories posit:

In the long run, as information becomes available, speculation will drive asset prices will toward asset real values. The players that do not (net)speculate in that direction will lose their ability to speculate for lack of funds.

I guess that is true. I think my father also told me that when he started speculating.

How little latency in speculation is needed to enable this driving of asset prices to their real values?

In the subprime bubble, some players suspected early that those houses were worth much less than consensus players assumed. And they were able to act on it, betting short months/years ahead, getting rich when the bubble imploded. These people did their homework, and acted at the right time for the long run to vindicate them.

I do not see how low-latency/high-frequency/high volume trading enables better and earlier homework, preventing large bubbles from occuring.

In fact, it enables those who do not do such homework to ride the bubbles. They can escape with less losses than those not doing such homework and not having access to low-latency trading (non-investment banks, fund managers ...). They can capitalize on the near-random fluctuations of the market and avoid the worst part of bursting bubbles.

[HippyFreetard]

SCIENCE!

"So, like, economics is a real science, honest. People who don't believe science are like, creationists, yeah. You're not a creationist are you? That would be stupid. Stupid creationists. So anyway, now we're on the same level, us science types, my science says don't tax the rich. Pretty simple, huh? Vote Tory. Science, see?"

[teebie]

Re: SCIENCE!

"so if economics is a science it makes testable predicitions that are shown to come true, yes?"

"shut up shut up shut up shut up shut up"

[Lars]

Re: SCIENCE!

I suppose science demand that testable predictions come true again and again. Perhaps economics is science too as the same errors are repeated over and over with the same result each time.

[J.G.Harston]

A lot of transactions are already taxed. Retail transactions (VAT), property transactions (stamp duty), asset transactions (capital gains tax), etc.

[I ain't Spartacus]

Capital Gains Tax isn't a transactions tax. You pay it on profits. VAT isn't either, because you don't pay it on all transactions, only the final one (it's reclaimed on the earlier ones).

Stamp Duty is, and applies to both houses and shares in the UK. At different rates obviously.

As an example of the effects of this, the stamp duty on houses in Belgium is 20%. This means people almost never move, once they've bought a house. So it has massive social effects. It's a massive distortion of the housing, rental and jobs markets for example, but certainly does stop speculation.

[J.G.Harston]

"Capital Gains Tax isn't a transactions tax. You pay it on profits"

When you make the transaction of selling the asset.

"VAT isn't either, because you don't pay it on all transactions, only the final one"

That's why I said *retail* transaction, ie to the final customer, not wholesale.

[I ain't Spartacus]

J.G.Harston,

The point of a transactions tax, is to tax transactions.

The point of a profits tax, is to tax profits.

So you don't pay capital gains tax on the transaction of selling the shares, you only pay if you made a profit, and that profit is over your annual capital gains allowance, and various other considerations. VAT is also different, for the reasons I've stated.

The idea of a transactions tax is to tax every transaction throughout the chain. Usually it's set small enough that it doesn't hurt, or affect the market too much. Sometimes it's done to reduce volatility, others just as a means of gathering relatively painless taxes. One of the downsides is that in long transaction chains, the taxes start to build up to quite high values. Unless that's the reason you're doing it, to reduce the number of transactions, then it can have serious unintended consequences. VAT isn't cumulative. The biggest problems with the FTT would most likely be to bugger up the repo market. That would mean problems for the Southern European government debt markets and for banks trying to raise short-term cash. Killing the repo market was one of the things that caused the financial crash - banks didn't trust each other, so they stopped giving each other short term loans, which is one of the ways they balance the fact that they lend on longer terms than they borrow. Causing another banking crisis or Eurozone debt wouldn't be ideal...

[kmac499]

The Dismal Science

I'm sorry but in my book giving a nobel style prize for economics is about as ridiculous as one for Tarot Card reading.

Any body remember Scholes-Black..

Or the two guys who made an error on a spreadsheet excluding relevant contadictory data.

Economics is not a science because it does not follow the scientific method.

1) make a guess on how things work

2) come up with a predictive test\experimant based on that guess

3) If the prediction is wrong, the Guess is wrong.

3a) If the prediction is right, the Guess is not proven right, so keep on refining and repeating 1-3

Fom what little I know of economics the central theories of perfect markets were taught for years even though it was obvious the concept was wrong. That's like chemists still teaching phlogiston, or medics the four humours..

[T_o_u_f_ma_n]

Sorry can't agree there...

Are we truly discussing buy/sell transactions made by human beings here or the billions of transactions done by bots in milliseconds over the tiniest of price difference ? Bubbles do exist as a result of both human and automated agents following trends like sheep. Theories and models in economics always try to come up with some rationalised excuses for the behaviours of the masses but usually miss out on a key element of human psychology: imitation. If raising a tax on transactions is the only way to have agents say "Hang on a sec..." or stop buying/selling en masse for short term gains, it should be supported. Any FTT that redirects some of the revenue of said speculation (as gambling is commonly known in financial circles) to state coffers is ought to be welcomed with open arms.

[Random Q Hacker]

Logic

Honest speculation is great and contributes money to ventures that need it.

Today's robotraders and hedge funds find ways to extract others' money from the market without contributing anything on the long term. It's more akin to gambling than investing.

A small tax on trades would have no effect on honest speculation, but could curb the abuse.

[Staberinde]

Vulture of the Right?

Tim's a fairly decent op-ed writer, but his continued presence on a tech site talking about vaguely scientific things as a fig-leaf for Right-wing propaganda seems strange. Now I like a bit of this stuff as much as the next guy, but where are the alternative voices in Vulture op-ed pieces?

[Squander Two]

Re: Vulture of the Right?

You're right. I tend to agree with Tim, because, you know, he's usually right, but he is at his best in a fight. If El Reg could persuade some Commie to write for them and then have the two of them argue back and forth, that could be fantastic.

[Anonymous Coward]

TAX TAX TAX them ALL!

Do you think they would stop trading? Do you think they will "pull out of Britain"?

If we were to impose a levy on financial transactions, do you really think that they would stop sponging from the English?

Think again.

Do I don't believe for 1 second it's going to impact growth/jobs because that would prevent the fat, ugly, greedy bastards from becoming fatter/uglier/greedier.

I'm not socialist or capitalist. Don’t stick you label on me! I'm a normal human being who thinks wealth distribution and supporting mankind is what separates us from the fking animals.

[I ain't Spartacus]

You do realise we already have a stamp duty on shares in the UK?

[Anonymous Coward]

the IMF know what to do

- they are pushing for a confiscation of 10% of each individual's personal wealth; its not clear whether this would be based on all assets or simply financial ones ( savings, etc ).

[Gordan]

Shorting the Housing Market

"Shiller has pointed out that in the US housing market there wasn't (and still isn't, not easily) any method of going short on the value of housing."

While it is true that this has serious impracticalities if done by the actual owners (moving is a pain in the backside), banks do it all the time - you can tell by the amount of deposit they require. The deposit requirements reflect the risk perceived by the lender of the house prices reducing. They are effectively saying that the risk of:

(house price reduction + inflation) =< (deposit + repayment + interest charged)

So perhaps this is something that should be kept in mind by those arguing that the houses are really increasing in value (as opposed to price) at the rate the statistics show.

[Scott Pedigo]

Why only expand markets to allowing shorting of houses and real-estate? We should be able to short anything. For instance, pants. If I see a polyester bubble-butt, then I should be able to short pants.

[b 3]

tax the bastards

no sympathy for these gambling banksters whatsoever.

financial trading is GAMBLING. it doesn't serve anyones interests apart from the gamblers who are only out for short term profit. it is PRECISELY this gambling (based upon mr bean at the bank of englands naive and foolishly low interest rates for far too l ong), that has led us into this mess in the first place.

[Vladimir Plouzhnikov]

Re: tax the bastards

"it is PRECISELY this gambling ... that has led us into this mess in the first place."

Yawn... how, PRECISELY, did it do it, please explain? Or, you can't? Thought as much...

[Anonymous Coward]

Re: tax the bastards

I actually work with traders, in risk assessment. I have never met a more risk-averse bunch of people in my life. Sure, they like to pretend to be reckless; they love that image. They like to talk about their job as if it's gambling, because that makes it seem more glamorous. But the idea of making a trade without a completely thorough risk measurement first? Anathema to them.

As an illustration, compare these two claims.

"After checking the credit ratings of the parties concerned and all available news on their prospects, I chose to invest £10 million in a financial instrument today. It should yield good returns over the medium term, but, just in case, I have ensured that the trade is hedged with an equal trade that will win if my trade loses."

"Dude, I totally blew 10 mil on a trade today. Then I blew another 10. Might all go tits-up, but fuck it, that's the kind of reckless gambling lifestyle I lead. Now, let's get drunk!"

The first statement is closer to the truth, but the second gets you more casual sex. Course, the second also makes the public hate you if they believe it, but who'd be silly enough to believe such obvious tripe?

[Faye B]

Prize Bull

It should come as no surprise that a bank is awarding a prize to an economist that says 'Please don't tax the rich'. A robin hood tax is no 'silver bullet' but the real reason for opposition is that it goes against the 'appeal to greed' that is prevelent in financial institutions. This is the ethos that only gaining more money is important, not trying to invest in a sustainable or even profitable future. And the reasoning for not making the rich pay up is that they will go elsewhere, thus removing their wealth from the system. In other words the rich will hit us with a big stick if we dare to make them pay for their gambling addiction.

Sadly this appeal to greed is contageous, with everyone wanting their share of the mythical riches, resulting in people becoming mouthpieces for the rich, shouting out that it is wrong to tax them in fear of losing out on the big money themselves. Whenever there is a call to redistribute the wealth downwards, particularly if it helps the poor, the same arguements of failed communism are dusted off and held up for ridicule. Totally ignoring that one of the largest economys in the world is run on socialist lines and was hard line communist for many years. Secondly, I suspect that if comparison was made between the more capitalist countries and the more socialist ones, it would be seen that the socialist ones have weathered the storm of financial meltdown far better than the capilist ones. However, not being an economist, I don't have those kinds of figures to hand.

[Squander Two]

Re: Prize Bull

> It should come as no surprise that a bank is awarding a prize to an economist that says 'Please don't tax the rich'.

The economists said no such thing.

[Faye B]

Re: Prize Bull

> The economists said no such thing.

True, an economist wouldn't have said "please".

[Squander Two]

Re: Prize Bull

Ha ha ha.

Seriously, though, the economists simply did not say that the rich shouldn't be taxed. In fact, Tim Worstall hasn't said that, either. Perhaps you need to work on your comprehension skills.

[Identity]

Unwarranted conclusion

First, a couple of disclaimers:

I'm writing from the States, so my knowledge of particulars about European taxation, et al, is sorely limited. I've not read the papers that resulted in the prize, only the sort of precis one finds in more general interest publications, such as this fine one.

That said, I have a couple of bones to pick with the author as to his descriptions of market transactions. I don't know if it's true across the pond, but here, if one does trade on information not generally available, it's called insider trading and is illegal (ask Martha Stewart). Trading, in and of itself, does not bring new information to market —and automated trading certainly does not— except to add to price history, which (as the required documents must state) are no guarantee of future performance. In point of fact, they're —at best— a rough indicator [as in, the bosses seem to have known what they were doing last quarter; they'll probably continue to do so. Except for, as Churchill noted, "Events, dear boy, events."]. As for the housing crisis, while you cannot, strictly speaking, short a house, there are many other instruments that make this sort of transaction possible. Most notably, the mortgages on said houses were infamously "sliced and diced" and sold as shares. Those could be shorted, and in fact were, even to the extent that the market makers did it, betting against their own customers. Lastly, I made a reply above regarding the 2001 Nobel Prize, which in many ways contradicts the conclusions drawn in this regard.

None of this has to do with a Robin Hood tax, but GIGO. In my estimation, one might have some small effects (both positive and negative, and dependent on the specifics), but it's really like emptying the ashtrays on a falling airliner. The entire economic structure of our world (insofar as we can consider it a single entity) is a house of cards. [By this, I mean the monetary overlay; not the intrinsic goods and services.] All these machinations serve merely to keep the game going — not to provide for the welfare (in the old sense) of the world, which supposedly is the point.

[Tim Worstal]

Re: Unwarranted conclusion

"I don't know if it's true across the pond, but here, if one does trade on information not generally available, it's called insider trading and is illegal"

Not quite true. You are absolutely allowed to trade on private information. For example, imagine that there was a publicly listed scandium mining company out there. There isn't, but just imagine there was. And then I knew that there was a new supplier coming to market. Me for example. In vast quantities, which will make the Sc price crumble. To below the price at which that listed company can make a profit.

Am I allowed to trade on that information? To short sell the stock of that listed Sc miner?

You bet I am. As much as I want to. I can trade on private information.

Now, change the situation a bit. Imagine you are the manager of that listed Sc company. And you find out about my new production process. You know your internal production costs and you know that my new production is going to bankrupt your company.

Are you allowed to trade on that private information? No, you're not. Because you have a fiduciary duty to your shareholders for the first reason and secondly, because you are using your own internal company information to trade in your own company's shares.

It's only certain sets of private information held by certain people that cannot be traded upon. Private information in general may be.

[BlueGreen]

Re: Unwarranted conclusion @Tim Worstal

Identity said: "As for the housing crisis, while you cannot, strictly speaking, short a house, there are many other instruments that make this sort of transaction possible. Most notably, the mortgages on said houses were infamously "sliced and diced" and sold as shares. Those could be shorted, and in fact were, even to the extent that the market makers did it, betting against their own customers"

This is very valid point, I believe, but puzzlingly you have not addressed it. I would be interested in your rebuttal.

[Tim Worstal]

Re: Unwarranted conclusion @Tim Worstal

I did in fact mention that you could short housing finance but not housing itself......

[BlueGreen]

Re: Unwarranted conclusion @Tim Worstal

> I did in fact mention that you could short housing finance but not housing itself......

I don't understand. In what way is 'housing finance' different from 'housing', financially speaking? How does shorting the former *not* affect the latter in the way you want it to?

[Identity]

Re: Unwarranted conclusion

I really have to wonder whether this is a difference in national trading laws or a very limited situation. In the Martha Stewart case, the officers of ImClone knew a drug had failed an FDA [Food and Drug Administration] test and sold their stock. So far, so good: this meets your second example. However, Stewart was told to sell by her broker (who knew about it from the insider trades). She was found guilty, despite having no fiduciary duty.

[Squander Two]

Re: Unwarranted conclusion

> if one does trade on information not generally available, it's called insider trading and is illegal

Not so: it's only insider trading if you got the information from inside the company, hence the name. Lots of information is not generally available but comes from outside.

[Squander Two]

Re: Unwarranted conclusion

Als, it wasn't Churchill who said "Events, dear boy, events." Honestly, I know every vaguely clever quote tends to get misattributed to him, but do we have to start attributing stupidity to him, too?

[Spleen]

Re: Unwarranted conclusion

"If you want your opinion to be taken as fact, attribute it to a great figure from history."

-Winston Churchill

[Identity]

Re: Unwarranted conclusion

My apologies. I should have Googled it, rather than using my faulty memory. According to that good service, it was Harold MacMillan.

[Rhone]

What does the EU Commission's study say about the tax they want?

What does the EU Commission want? The Financial Transaction Tax. What does the EU Commission's own study say about their own tax? European Scrutiny Committee citing EU Commission's own FTT Impact Assessment: "The Minister next discusses the Commission's impact assessment accompanying the proposal, saying that: a 3.43 % fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs."

Negative revenue: UK conducts 80pc of EU transactions and will pay 80pc of the economic damage. The tax destroys its own revenue base. That would be a GDP loss of €442 billion that would have been taxed at approximately 40pc for a loss to various governments, mostly the UK, of €177 billion.

In addition to substantial losses on investment yields, the public can expect significant cost increases for insurance, mortgages, products and services. IMF's FTT Final Report For The G-20, June 2010, "Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector."

[sisk]

So what we have here is a bank giving an award to people who say that taxing what banks do would be bad.

I'm not saying that they're wrong. My knowledge of economics is so great that my instructions to my broker amount to "I'm giving you money every pay period. Make sure I have enough money to retire when I'm 68", so I'm not in a position to comment on whether they're right or wrong. But this is like a criminal agreeing with the philosophy behind Bastoy Prison in Norway: expected.

[Stevie]

Bah!

And here I thought the crash was brought on by the banks putting all their eggs in one basket (ie another bank offering CDS instruments) while making bad bets with other people's money, coupled with the basket not having the sense to see when enough was enough.

Related off topic rant.

I have a relative by marriage who is "in finance" and he trotted out the reasons why bonuses - for fuckwits who were asleep at the wheel and who drove the country's economy so hard onto the rocks that it threatened to show the world that capitalism was an unworkable ideology in the most graphic way - were valid.

1) They will go somewhere else if we don't pay them.

My response: Let 'em. If any country is so stupid to allow these weapons of mass economic destruction work within their boundaries they deserve all they get.

2) They are the only people who understand the complex financial instruments they've set up.

My response: We get that in the computer field a lot: people who confiscate the passwords "for the good of all". We stick them in jail until they change their minds, then fire their asses for unethical behavior.

3) The bonuses are a contractual agreement.

My response. So are the Wisconsin teachers' pensions, but everyone is falling over themselves to explain why it is fair of the state to renege on that contract and unfair of the teachers to demand their contracts be honored in good faith.

I also pointed out that if not for my tax money and that of everyone else, these idiots would be standing on the street with a sign made from shirt cardboard saying "will work for food" while the rest of us tried to work out how we would survive the gazillion percent inflation they'd wished upon us and what we would do now our 401K plans had evaporated like an Iraqi WMD. Some acknowledgement of that might be in order *before* dipping into the funds for their next BMW.

[ecofeco]

Re: Bah!

Thank you Stevie. Well said.

All see in this article is yet another attempted justification of the criminals who got us into this mess too keep the status quo.

[ecofeco]

Re: Bah!

Correction: "All I see..."

[Squander Two]

Re: Bah!

Well, at the moment, you can't short housing stock. What the economists are suggesting is that it would be better if you could short housing stock. So that's a change they're advocating for. You might be for or against the change, but describing a change as "keeping the status quo" seems odd.

[Stevie]

Re: Bah!

Not sure how that would work. There is no "stock" in housing, only loans made that bear interest. The loans get sold on, but unless there is a balloon payment built into the original loan there is no point in "shorting" the "stock" in the loan.

Since the loan will not perform better no matter how hard a "stock" holder whines it is hard to see why anyone would want to trade them as stocks in the first place. Loans are more like futures.

Besides, the housing markets are not a rich field in which to sow the seeds of the next crash. The field you want for this sort of selfish idiocy is currently growing a crop of Student Loans.

What I'd like to know is: at what point does sabotaging the economy of the country (and by extension the western world) get properly classified as actions likely to give aid and comfort to the terrorists (I know; we don't use that term since GWB but stick with me) and therefore treason - an offense fr which we *can* kick their miserable asses into the nearest maximum security hell. When did the self-interest at The Top stop being "enlightened"?

[Lallabalalla]

tl;dr

The buggers make WAY too much money, our country is falling apart from lack of it, and they've got it all. Give it TF back!

[Johan Bastiaansen]

Don't tax my job...

That's what this is about. Don't tax my job. Tax somebody elses job instead.

While you can not short on a house, you can short on property. There are companies who invest in property and their stock is on the market. You can short on their stock if you think the value of property is going down.

But there's another consideration. How does trading contribute to wealth? Why is it that the trader makes the big bucks, but the companies that build the houses make less, and the fools who actually do the manual labor of building the house don't make enough to buy a house?

[Captain Save-a-ho]

Couldn't hit water falling out of a fecking boat

And the prize to missing the point goes to:

"Central to the Robin Hood folks' logic is that there's such a thing as too much financial speculation."

Wrong. The central point of a transaction tax isn't to discourage investment. The central point is to vastly expand the tax base so large that the tax burden can exclusively rest on those who choose to undertake financial transactions. Whether the tax will have a deterring effect on investment is debatable, but irrelevant. No amount of discussions about tax policies or economics can ignore the overwhelming mathmatical support for moving to a transaction tax model exclusively. Note the work at http://www.thetransactiontax.org and http://www.apttax.com

[Joe_OReilly]

Algorithmic trading voids this entire article

I love the kind of article where someone makes claims that completely ignore reality. Algorithmic trading now accounts for 50-80% of all market trading, and the algorithms aren't acting on new market data, but solely speculating on movements generated largely by others of their kind.

The noble fluff about efficient markets and speculation as the information lifeblood of market movements is just that - noble-sounding fluff. It bears no relation to real markets - and I'm sure we're all surprised by that.

[BlueGreen]

... there wasn't (and still isn't, not easily) any method of [shorting] housing

First, you need to be clear: "still isn't, not easily" means that there was a way/ways. So what was it?

2nd, I do believe recall some trader doing just this and retiring on it.

3rd, (and this is all according to my understanding of shorting) to short housing you need to have someone who goes long on it. IOW, an other party who disagrees with you and is prepared to stand by their belief. Since there was the near-universal belief that housing would bubble on forever, there must have been plenty of 'long' believers who wouldn't mind making a packet by taking on a bear in a bet. Therefore I can't accept your claim that it's difficult to short.

Other than that, fine article, probably.

[johnwerneken]

yep

Like most things, it's obvious given thought.

Lots of individual decisions work better than cooperation of any kind that involves more than a handful of people.

[Suzie]

Robin Hood Nonsense

The tax discussed here has been rejected by every country beyond a few little European nations bullied into something they now regret. Highly reputable academics, international treasurers, policy analysts and decision makers repeatedly slammed this tax as toxic, ideologically driven and unviable. Its targets were ordinary working people, farmers, small businesses, pensioners and small investors. But just as worrisome was its exponential economically damaging potential. Think Sweden - the country that experimented and couldn't get rid of it fast enough.

The Asian region was the destination for transaction tax overtures by distant, last century Europe's Mr Barroso, whose bad judgment included wasting EU taxpayers' money touring the world attempting to force his unworkable, nonsensical idea on those who long ago formally expressed 100% rejection of it. Mr Barroso was politely advised by our government officials in this burgeoning and competitive Asian region to go back to Europe and look after his own business.

The GFC was caused by the irresponsible issuance of mortgage loans to irresponsible borrowers. This began during the Clinton era; Clinton believing that everyone was entitled to take on debt, regardless of their ability to repay. The so-called Robin Hood Tax (pushed by dangerously under-informed charities with glistening eyes on an impossible share of a highly improbable pie) was a non-starter then and always will be. James Tobin ultimately revised and rejected his own idea before he died.

[eldakka]

I can't reconcile these 2 statments.

With respect to this Nobel:

Quote: "The award of a Nobel is as close as we get to an affirmation that this is the scientific consensus."

With this statement:

Quote: "The Nobel Prize in Economics isn't quite a Nobel as it's awarded by the Swedish Central Bank"

How is an award from A, one, singular, central bank of A, one, singular, coutry, a scientific concensus?

[armster]

Right facts wrong conclusion

While it is true that more ways to speculate might bring the price of a commodity closer to the 'real' price, this assumes that we want the commodity close to the real price. Any engineer should know that if you remove all damping from a system it reacts very fast to change, but that still means we want damping in a system. The tax does not prevent any type of speculation. You can still go long and even sell naked short. You just have to pay for it. This is the equivalent of a damping force on a mechanical response. Remove the shock absorbers from your car and your tires will follow sudden dips and bumps much more closely. They will follow the 'real' road. The ride quality for the man in the cab will suffer.

[Nick De Plume]

Re: Right facts wrong conclusion - wrong example

if you remove your shock absorbers, your car will NOT follow the road well (unless the road is smooth as glass). It will bounce, and lose contact with the road surface, becoming quite hard to control.

[Nick De Plume]

Rule of thumb, layman here.

Let me get this straight:

- if you work to create something or provide a service, then your gains are taxed.

- if you just manipulate money and create nothing and provide nothing, yet make huge sums incommensurate with, well, anything, those gains are not taxed.

[Vladimir Plouzhnikov]

Re: Rule of thumb, layman here.

"if you just manipulate money and create nothing and provide nothing,"

If you don't understand or have no use for something that does not mean it's of no use to everyone else.

"yet make huge sums incommensurate with, well, anything"

I can only repeat the same thing - if something is not of value to you that does not mean it does not have a value.

"those gains are not taxed."

That simply is not true - those gains are taxed.

I suggest you go buy some straw futures - at the rate you are building and burning your strawmen you will run out before too long and the extra demand created by you will certainly raise prices...