A Transaction Tax is Not The Solution To HFT
- Posted by Jeff Carter
- on March 25th, 2013
In Europe, they are enacting a transaction tax on trading to “curb effects of HFT”. That’s merely an excuse. There are people out there that have proposed a transaction tax on trading for the last 50 years. Government budgets are broke enough, and there is enough venom towards big banks that they are finally getting their way.
It’s the wrong way. Speed and the effects of speed are giving a false positive to people that want to tax the market come hell or high water. This is a solution to a non-problem. The fallout matters little to them as long as they can tax something new.
High frequency trading by itself isn’t a danger to markets, nor is it bad/good for markets. It’s just an evolutionary development that leads to faster transactions.
It doesn’t matter to me if it’s an algorithm deciding to trade or a human. Makes no difference. Humans have been internalizing and analyzing data for years to make trading decisions. We use Excel to process financial accounting transactions-why not high tech algos to process trading decisions?
I am not empathetic to those that want to tax or end HFT.
However, the playing field in the trading industry is nowhere near level. It’s rife with subsidy that allocates edges to big players at the expense of marketplace fairness and competitiveness.
The roaches in the US legislative bodies come out to play when the transaction tax is mentioned. US Senator Tom Harkin and Senator Pete Defazio endorse it. Jan Schakowsky has previously endorsed it. John Dingell and Ed Markey are fans. No doubt, there are others. The problem is when you shine a light on them and reveal their true motives, they run back under the floorboards.
If the country and industry really wants to “cure” the HFT issue, it needs to restructure the entire trading industry. Frankly, because of intense lobbying on the part of big banks and others, that’s never going to happen.
If they really want to make the playing field flat, while encouraging innovation, there are some simple steps they can take.
1. End dark pools
2. End fungibility on the SEC side of the marketplace and allow exchanges to control their own clearing.
3. End sub penny spreads and go to .05 wide spreads
4. Give everyone the same access to the market on the basis of speed. No co-location. (conversely, everyone gets the same location)
5. No more payment for order flow, or internalization of order flow….period.
Competition wouldn’t take place on the basis of who has the better lobbyist or who can find a loophole in the system. It would take place on the bid/ask spread of the market and that’s where it should be. If an HFT can outwit me by processing data better-good for them. But right now independent traders are losing because of co-location, dark pools, payment for order flow and other unnatural elements in the marketplace.
Let’s all just put our balls in the line and be the best bid or offer and see where the chips fall. But banks haven’t ever been about true competition. Their concern has always been writing the rules in a way that they can smile at their customer while stabbing them in the back, along with getting an edge on the marketplace that no one else enjoys.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)