Hillary Clinton wasn’t talking about her email scandal the other day. She flip flopped on a trade package and then waded into populist waters. It’s popular to hate Wall Street. After all, they destroyed our economy right?If you investigated it further than news headlines, it wasn’t just Wall Street but Fannie Mae and Freddie Mac too. It’s always popular to hate those greedy traders until you want campaign donations from them. Because of this populism, Candidate Clinton proposed a tax on high frequency traders. The tax would target orders that were excessively entered and cancelled.
Regular readers of this blog know that I have some issues with HFT. To be clear, I am not against HFT, but I do want a level playing field. Electronic trading done the right way would be really great for markets and individual investors. Today, they get ripped off. The exchanges have created a field that favors HFT. The regulators have slanted it even more. HFT has an advantage over the rest of the market. That’s why they rarely if ever have a losing day.
But, that doesn’t mean they need to be taxed. Taxing HFT will accomplish nothing. In fact, it will make markets worse, not better. This isn’t any different than any other transaction tax politicians propose. Technically, they are called a “Tobin Tax”. Tobin taxes are used to stop behavior that is considered “bad”. It’s normative economics. Normative economics might feel good for a while, but free markets always find a work around.
Other people that don’t appreciate high frequency trading might see this sort of tax differently. They’d say that it wasn’t a Tobin Tax, but a Coase Theorem solution to a problem where a tax is justified to fix a negative externality. Except they’d be wrong too.
The negative externality probably wouldn’t exist if the market was structured correctly in the first place. Markets have advantages that are built in today because of regulation. That’s how a firm like Goldman can go years without having a losing day trading.
Markets today are much more volatile than they used to be. It’s not that information gets priced faster. It’s because markets are being priced based on speed to market and not price. There isn’t a market around that doesn’t have the potential to run anyone over. The other day I wrote how Democratic Senator Warren is trying to limit information to smaller investors. She’d rather have them in the dark, fearful, and losing all their savings.
There is that word “excessive” too. What’s excessive? When we traded in the pit, an order was an order only if you were yelling it out. If you were silent, you might or might not want to trade. If an order filler was nice they would ask you. Most order fillers weren’t nice and that’s why trading floors were so loud. Do we want an attorney, or an appointed bureaucratic regulator to determine what “excessive” is? If I trade 100,000 round turns
An example of a real life situation where this tax could be incredibly harmful is in Treasury futures. Since the CME decided to favor HFT trading over every other trader in the marketplace, the pool of entities trading Treasury futures is considerably smaller than it used to be. Yes, they trade more volume. But, the breadth of the market is a lot smaller. By breadth, I mean less firms are trading or conversely, more and more volume is being done by fewer and fewer firms. This has caused a liquidity vacuum in Treasuries. When customers need to get out, no one is there to get them out. That slippage of the bid/ask spread has made the all in cost to trade Treasuries more expensive. By the way, that increases the cost of debt to taxpayers.
What do you think a tax would do? It would make the slippage in Treasuries even worse-and further increase the costs. That would hurt all Americans in their pocketbooks, not just the entities paying the tax.
There are very few people in the government, elected or appointed, that truly understand how a core marketplace works. Ms. Clinton and her advisors are clearly out of touch with what a marketplace does-even though she made $100k trading cattle all those years ago. Even that was simply a scam on a spread. Someone took the losing side, probably a political friend. Too bad we didn’t have email back then.