It’s Time for a Tax to Kill High Frequency Trading
It’s frustrating to know that there’s a simple solution to a serious problem but no one seems willing to do the obvious.
Tax maven Lee Sheppard in an article at Forbes describes how transaction taxes could very quickly put a brake on numerous undesirable activities: high frequency trading, the explosion in derivatives, and overuse of repo financing. You might collectively think of these things as “junk liquidity” or “junk trading”.
HFT has proven to be singularly destructive. Despite the claims of it defenders, it does not increase market liquidity; it merely increases trading volumes without improving ease of execution. 60% of US stock market trading volume comes from HFT. HFT has undermined how markets operate. Institutional investors have diverted some of their trades to “dark pools” to escape the pred Retail traders have become increasingly distrustful of equity markets, thanks to HFT-related debacles like the flash crash and Kraft’s first trading day at NASDAQ, when its initial trades had to be cancelled. CFTC commissioner Bart Chilton pointed out some other casualties of “cheetah trading” in a speech on Tuesday (hat tip Michael Crimmins):
A few weeks ago, the Tokyo Stock Exchange closed due to technology problems. We’ve seen a few contracts shut down for different periods in Chicago and New York last month. We’ve seen market volatility increase wildly: natural gas plummeting eight percent in 15 seconds last year. One day silver plunged 12 percent in about as many minutes. One energy trader lost $1 million in one second—in a second! We saw crude tumble $3 in a minute last month. We continually see sharp rises and falls in precious metals. Knight Capital Group, in August, lost $440 million based on software trading mistakes—throwing it to the threshold of bankruptcy. There are numerous other instances and it’s a safe bet that there will be still others.
More invaluable advice from Robert A. G. Monks, analyzing the new breed of dysfunctional “drone corporations.” He calls out the most influential trustees of pension funds, endowments, and foundations by name to take responsibility. A must read by asset managers and trustees worldwide.