Ireland’s Policy Stance on a Tobin Tax

The most recent Final Conference to Save the Euro ended in disarray when the UK refused to sign up to a proposed set of EU treaty changes. The UK’s veto was due to the inclusion of an EU-wide Tobin Tax on security transactions in the set of proposals. The justification for an international Tobin Tax is quite strong. Hypercompetitive securities markets with excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability. A Tobin Tax would eliminate these dangerous trading excesses without impinging much on underlying market efficiency. On other hand, the UK government’s refusal to sign up to an EU-only Tobin Tax, imposed on the City of London while the US and Asian global financial centres remain outside the tax net, was an obvious and sensible policy decision for the UK.

After the proposed EU treaty changes were restricted to a coalition of the willing, the Irish government fretted that a Tobin Tax might particularly disadvantage the Irish financial services industry, given that the UK will be outside the tax net.

What should be Ireland’s policy stance toward an international Tobin Tax? Should Ireland do the right thing as a global citizen by supporting such a tax within the Eurozone, or should it protect its international financial services industry from UK (and non-EU) predation and therefore veto any such tax proposal? It would be much better for all concerned if the Tobin Tax could be imposed at a global rather than EU level.

Sometime in the future, May 6th 2010 might rank with August 9th 2007 as a “warning date” for a subsequent financial market disaster. Recall that starting on August 9th 2007, quant-trading hedge funds experienced an extremely turbulent, credit-market-related meltdown. Although the quant-trading markets calmed down after about two weeks, many analysts now recognize this as an early warning signal of the subsequent global credit crisis. In an interesting parallel, on May 6th 2010, high-frequency trading systems generated a “flash crash” of US equity markets, causing a 9% fall and 9% rise of the US stock market within a 20 minute period. Some individual stock prices went bananas; completed trades at crazy prices during this short “flash crash” period were annulled that evening by the NYSE board. Since the markets righted themselves within a day or two, many analysts have forgotten about this incident. But could this “flash crash” be an early warning sign of a subsequent “permo-crash”? High frequency trading (HFT), using entirely computerized systems to trade at hyper-second frequency, now constitutes 70% of US equity and equity-related (equity baskets, futures, options) trading volume, and 30% in the UK. If HFT generates a flash-crash at the end of the trading day, rather than mid-day as on May 6th, and something else goes wrong at the same time, it could lead to an enormous disaster.

Tobin originally proposed his tax for the foreign exchange market, which was the first financial market to have hyper-competitive trading costs. He saw that most of the trading volume in forex markets provided very little economic value. A small tax would have a big influence on trading volume, rendering purely speculative and potentially destabilizing trading strategies unprofitable, while having little or no impact on the real economic value of these markets. Tobin called it “throwing sand in the wheels” of securities market trading. Nowadays, Tobin’s “sand in the wheels” metaphor is widely misunderstood. Tobin was a World War Two naval officer and throwing sand in the wheels was an accepted way to improve machine performance in his day. For mid-twentieth century machinery a little sand in the wheels would slow down the mechanism (think of something like a navy ship’s water pumps) and make for more reliable performance with less chance of overheating. With modern precision engineering the notion of “sand in the wheels” as a repair method seems ridiculous, so commentators assume Tobin is advocating sabotage of securities markets. That was not what he meant – “sand in the wheels” is an old-fashioned procedure to slow down machinery so that performance improves, not a means of sabotage. Oddly, the tax is designed to generate minimum revenue – it relies on the elasticity of trading volume to net costs, and tries to drive out destabilizing short-term trading strategies while collecting minimal tax revenue.

Now, after decades of hard-fought liberalization, US and UK equity markets have the same hyper-competitive trading costs as forex markets. HFT has hijacked this and feeds off this market cost improvement (and by earning net profits from “normal” market traders) with trading systems that add little real efficiency improvement for markets. Eliminating their net profits with a small tax would do little harm, and make markets safer. The very bright computer scientists who run these HFT firms could go back to socially useful activities like designing better software.

There is another interesting parallel to the global credit crisis. US housing regulators worked for thirty years to increase access to owner-occupied housing for lower and middle income households and this was a big success. Then, they took that policy too far, and the policy was hijacked by self-interested actors in the US property lending and securities trading sectors. There was too much of a good thing in terms of the too-low-credit-quality US residential property lending market. The same applies now with securities market trading costs and trading access. Regulators have succeeded in driving out bad securities trading practices and greatly lowering trading costs, but this process has gone too far. It has been hijacked by HFT. I call this the Too Much of a Good Thing (TMGT) theory of regulatory capture.

During the credit bubble, Ireland enthusiastically joined the dumb-down contest to impose the minimal possible regulation on the financial services sector. Perhaps now Irish policy leaders could make amends by joining the push for a Tobin Tax.

How would a Tobin tax impact the competitive draw of Dublin for its brand of “off shore” financial services? Perhaps it would be the death knell for the Irish stock exchange since all trading volume might migrate to London. Ireland policymakers should encourage a global solution, bringing the US and UK in particular into the plan. Asian markets (which are not yet competitive for HFT) might be willing to cooperate as well, since there is no great cost for them.

129 replies on “Ireland’s Policy Stance on a Tobin Tax”

Ireland will do what it is told.

Global citizen ? – what are you smoking boy ?

This ship is going down – its torpedoed but we are not sure if its back is broke yet – its very dangerous to be in the engine room now.

There is a choice of 2 lifeboats – Gold or $$
However one of the junior officers reported that some shell splinters have penetrated the hull of one of these life carriers.
Not sure which one though.
Better take your chances with one of these anyway.
Good luck chaps.

I’m not terribly worried about flash crashes in stockmarkets. The people who lose money tend to be the operators of these systems. So as long as there’s no threat to systemically important assets (such as deposits), I’m happy to let them take the risks and eat the losses.

Nonetheless, I am opposed to short-term trading and support a tobin tax. I believe the short-term trader is extremely harmful to business. Their lack of vision for a company, other than immediately raising the stock price, means that management is poorly vetted by these stockholders. This is a serious problem. After all, if a CEO is ultimately accountable to an algorithm, there’s not really much scope for judgment or innovation in management.

I believe that the voting rights of shareholders should be suspended until they have owned their stock for 3 months or more. Where the stock of a company is circulating significantly, the oversight of shareholders over the board and management is impaired. Fast buck investors have no interest in sustainable strategies. Indeed, they are likely to pursue harmful policies if they think it will secure their short term gain.

By excluding short term traders from the decisionmaking process, we could improve the long term strategy of businesses. A tobin tax will also commit investors to taking an interest in growing their business, rather than making their money from merely trading ownership of it.

I am interested in your use of the phrase “do the right thing as a global citizen” and which I think is somewhat on topic as it demonstrates the defact mindset. Why would it be that a country like Ireland should step up to its responsibility as a global citizen when so many countries make no effort to do so. Look at countries whose birth rates are effectively out of control. No question is made of them to act responsibly. What alleviates them from acting responsibly i.e encouraging reductions in birth rates, reducing corruption, reducing defence spending, and run their counties more efficiently. No clearly we aint experts in running our country but then that doesnt absolve other countries from running theirs poorly.

So what responsibility Ireland to be a responsible global citizen. Free rider style problem but others are free riding as well yet never asked why.

No please dont shoot the person asking the question. Its not clear to me what the answer is so I am throwing it out there for your thoughts a chairde. In a country in a depression and in a continent grinding itself down via austerity these questions are being asked of govts. right now. Whats the answer?

Irish policy-makers should understand that 1. US cannot be “brought into a plan” for a Tobin tax (any more than they can for a carbon tax) and therefore that 2. suggestions like Ireland’s “policymakers should encourage a global solution, bringing the US and UK in particular into the plan” essentially means that Irish policymakers should refuse, permanently, to participate in a Tobin Tax.

[…] The most recent Final Conference to Save the Euro ended in disarray when the UK refused to sign up to a proposed set of EU treaty changes. The UK’s veto was due to the inclusion of an EU-wide Tobin Tax on security transactions in the set of proposals. The justification for an international Tobin Tax … Icerocket blog search: forex […]

I’d have an open mind on a global Tobin (I’m not against it but would like to see the detail). A subset of countries introducing a Tobin tax seems a bit mad. Ireland should bat this back with a list of concerns to be addressed before coming to a decision.

@Dork of Cork

I spent all day writing that entry and I was hoping for some serious comments (e.g., see those following yours) rather than pseudo-poetry of whatever that stuff is you wrote. You should pick on the shorter entries where someone has just provided a link to another website entry, since those are much quicker to prepare and the writer does not have a day’s work investment in them. Or at least you could wait until the comments die down a bit.

Reminds me of a similar analogy, reducing our CO2 emissions.

By investing in more renewable sources of power we drive the price of electricity up. This undermines our competitiveness and increases the cost of living etc. But it is still justified on the grounds that we are doing the right thing for the planet etc etc.

Similarly perhaps a Tobin tax is also the right thing to do, even if the tax collected is just put into a savings account which does not get raided. A bit like a cookie jar which is getting fatter. Which leads to another point, if the tax collected builds up over time who gets to spend it? Will there be conditions on how it is spent?

Even if this financial crises gets mended and over the next 20 years we manage to crawl out of the mud, what mechanisms will be in place to prevent / repair the next crises? Perhaps a un-raided Tobin Tax fund will be sufficiently able to solve the financial problems of the future?

I feel Ireland will go with the general flow on this one, it has already been told what to do many times in the last year. Its not Labour’s way.. its Frankfurt’s way.

When you “Hypercompetitive securities markets with excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability. A Tobin Tax would eliminate these dangerous trading excesses without impinging much on underlying market efficiency.” What is it about the design of the Tobin tax that makes this possible.

Also, with the UK out, does this not undermine the whole point anyway since this kind of trading can continue in the city but the systemic risk remains to rest of the global system?

@William Phelan

Bill Clinton might have been able to pull it off in terms of getting the US on board for a Tobin Tax — or Jimmy Carter before him. Why not Obama? He needs a bold policy initiative pre-election. The Republican opposition will have trouble claiming that the HFT industry represents the “working class” interest. You are right I admit it is a long shot but why not at least an attempt?

I was hoping you were not another softie with two chips on your shoulder.
The lack of a sense of humour amongest Irish academics is frightening.

I hate to be stuck in foxhole with yee lot, with the Hun coming from all angles.
Perhaps you a right – maybe I should take time out with some Northern Pictish friends.
This Gaelic man of the world thing is over my little head.

@ All

I posted the original Le Monde report on this on another thread.

It may also be worthwhile having a link to the actual proposal tabled by the Commission.

It will also be noted that the Commission proposal is linked to creating a new revenue stream for the Own Resources of the EU (€57 billion), the imaginary carrot which undoubtedly allowed the College of Commissioners to agree to table the proposal.

Both Paris and Berlin have said that, failing achievement of the necessary unanimity, they will press ahead with the proposal either at the level of the Euro Area as an “enhanced cooperation” under the treaties (requiring at least nine countries to sign up but only when that step has been shown to be a “last resort” – Article 20.2 of the TEU – i.e. there has to be a genuine effort to get consensus), or on their own.

Their respective financial markets will be overjoyed if the last-mentioned turns out to be the case!

Proceeding with this proposal it is a bit like lighting a match in a political powder magazine. Neither the US nor major players outside the EU are willing to sign up. And the UK views the proposal as the equivalent, as one commentator put, of abolishing the Common Agricultural Policy for the French.

Sarkozy is indifferent to these considerations. Luckily, he is facing an electoral test in a few months which will decide whether there is democratic backing in France for his rather idiosyncratic conduct of the external relations of his country.

A more Machiavellian view of the posturing on this topic might be that the various parties are testing the defences of the opposition with regard to the agreement to be reached on the next seven year multi-annual financial framework.

I think the implementation of the Tobin tax is key….

This is one of the cases where the tax is in neither the buyer or sellers interest… neither party in the trade get any benefit from it… and they have the money, expertise and reach to cooperate and come up with ways to delay or obstruct payment.
Combine that with the finance industries track record and the global nature of the game, it is hard to see it being effective if neither party really wants/needs to pay it.

I believe some way must be found to incentivise one or other party to pay the tax or force the other to pay it.

Heres a link to an idea….

CVAT… a contract value added tax… basically should be calculated as a very small % of total contract value and it gives the paying party the right to sue the other in the juristiction they pay the CVAT in for up to the total contract value.

No CVAT pre paid, contract is worthless, which would help force compliance in certain trades…. whoever country collects the tax owns the problem if it needs bailing out… would be possible to have an Euro Area/EU wide tax to get critical mass

Im sure there are better ideas out there

I’ve oftened wondered how the UK can be so anti the introduction of a Tobin tax when the UK government already has a 0.5% stamp duty on share transactions of UK companies. Does that not classify as a Tobin tax of sorts?

The UK rate is one of the highest in the world as far as I know and has been considerably higher in the past yet you hear few people ever mention it yet alone call for it to be abolished.

Finance was 8.5% of US GDP in 2010, up no 2008, and up from 4% in 1970. The entire financial ponzi is going to mean revert back to a simpler time with fixed exchange rates and capital controls. It’s what the creditors want.

We can try and rent seek with our tax haven for a while longer, or we can show a bit of foresight and sacrifice the IFSC in favour of some debt reduction.


I think most HFT in the UK uses contracts for difference rather than actual shares to avoid stamp duty? So the HFT sector does not incur stamp duty, but it would need to be covered by a correctly constructed Tobin Tax.

Something like a Tobin tax is badly needed, but, like climate change policy, to be effective it has to be all or nothing on a global basis.

However, in the context of the EU I think it is simply a popularly attractive bargaining chip being used by the political ‘powers-that-be’ in their game of chicken with bond market participants. The markets see right through it and it will disappear when voters in the core EU finally give their consent to do what is needed to rescue the Euro and popular tub-thumping of this nature is no longer required.

I think Ireland should stay shtum while this game plays out.

Interesting post.
The collective action necessary by the international community to make this tax workable seems to be lacking, even if the season of goodwill is just passed.

That not withstanding, the tax would have to be carefully levied; the potential for arbitrage cross country/instrument is enormous. Think about it. An equity index (SPX500) transaction is taxed, thats ok, the index future is more liquid, tax that instead? how about a equity index total return swap from your vampire squiddy investment bank? The tax would need to account for the ability to synthetically replicate the payoff profiles of the products.
It seems to me that a more workable approach to the problem of destabilising dynamic trading/ hft/dark pools is introducing appropriate circuit breakers (uptick rules, timeouts etc.) and possibly curb/ban off exchange trading. Much more attention deserves to be paid to this issue and how these firms interact with the regulated financial system and infrastructure – such as clearing houses. That’s where policy makers are pushing trading to go but maybe with unintended consequences: could a severe or sustained bout of hft volatility lead to the mother of all margin calls for CCP?

A number of points

1. Globally a FAT tax or any derivation thereof is an excellent idea. It plucks the best feathered geese whose sole benefit to mankind is to fatten themselves while loosening their bowels on the rest of the world. Not one iota of value is added to anything on earth or space as a result of such activity.
2. There may have been more to Cameron’s rejection of the latest Merkozy treaty idea that the protection of the City. Either way the UK is unlikely to accept restrictions / taxes on trading unless it is global in nature and there are not cat a competitive disadvantage.

3. The reliance on HFT technology and algorithms as pointed out is an accident waiting to happen. I understand that there are plans for a new transatlantic fibre optic cable that will shave further milliseconds in transmission time. The big buyers for time on this cable are of course the banks and HFT companies.

4. I doubt that a Tobin transaction tax on its own would cause an exodus of ‘financial’ firms from Ireland. My understanding is that most are back-office in nature and would not therefore depend on HFT as a main or even minor source of income.

However, to the question of what should Ireland do?

A. Ireland has nothing to show for ‘doing the right thing’ except debts. Its fear, its naivety and its stupidity were used against it in the most crude and threatening fashion best epitomised by the Merkel/Sarkozy assault on Kenny at his first meeting to get further concessions from a defeated country.
B. As Ireland’s stand to gain nothing from supporting this tax and has nothing left to lose by opposing it, Ireland should opt for the latter approach. In effect this would be the Fintan O’Toole idea of conceding nothing more without concessions.
C. No more Mr Nice Guy. We know how he fared in modern Europe.


this tax has been proposed as a component in the resolution of Europe’s banking cum sovereign debt crisis. Had it been in place since 1999, it would have done precisely nothing to avert that crisis whose sources lie elsewhere, a characteristic it shares with several other components of the ‘solutions’ package on offer.

Ireland’s best path to ‘good global citizenship’ is to insist that the European leadership address the actual flaws in Europe’s single currency.

If there is a case for a FAT it is quite independent of the Eurozone crisis. Those who seek to conflate the two should be discouraged, as a matter of intellectual hygiene.

The Commission support is of course related to a grab for the revenue as more ‘own resources’ (great self-serving phrase). A French minister announced, even more fantastically, that the revenue could be used to fund a Euro-area deposit insurance scheme. If it is revenue people are concerned about, the exempt status of banking under the VAT Directive is the real issue.

@Gregory Connor

Notwithstanding all the ink and pixels expended over the last couple of years by many people, I’ve seen remarkably few proposals that combined a strategy, some shorter-term steps and that clearly described who will pay/take the losses. One of these few was Chopra’s Kenmare speech last year. Here’s what he said about a Tobin tax:

A pan EU-deposit guarantee scheme could be pre-funded by a harmonized bank levy on selected bank liabilities or a financial activity tax (FAT). A FAT, where the base is the sum of profits and remuneration paid by banks, comes close to mimicking a VAT on financial services. A financial transaction tax, as recently proposed by the Commission, would be less attractive because of its potential distortionary effects and scope for evasion.

This was in the context of an EU bank resolution scheme, where losses would be imposed up the equity/bondholder chain, including on senior bondholders, but where depositors would be protected by a pre-funded deposit insurance scheme.

The financial crisis was not caused by HFT, but by the incentive structures that were in place in the financial industry. The proposed solution should be the simplest one (to minimize unintended consequences) that directly tackles the underlying causes. It seems to me that Chopra’s FAT is both simpler and more effective than a transaction-based tax.

Are we sure we have our terminology correct…and do we understand what was actually being discussed…?

Unless I’m mistaken….A FAT (tax) is a tax on profits made by corporations from financial activities. This is NOT, to my knowledge, what was being proposed by the European Commission.

A Tobin tax is a tax on currency trading. This is NOT what is being proposed by the European Commission

What is being proposed by the EC is a Financial Transaction Tax. A tax on every single non-consumer, non gov’t instrument-related transaction.

Details here:

This tax could reduce the value of pensions (further).

Page 2 of the proposal shows just how disinterested the EC is in proposing this tax when it says: ‘In line with the Commission Proposal for a Council Decision on the system of own resources of the European Union of 29 June 2011, this proposal also aims at creating a new revenue stream with the
objective to gradually displace national contributions to the EU budget, leaving a lesser burden on national treasuries.’

The Commission has thought this up as a wheeze to fund itself whist relying on arm-chair anti-capitalists to support it. The preamble to the proposal says that something called the financial services industry caused the crisis.

This is not true. The financial services industry lit one of the matches. The other was lit by governments. The petrol of bad euro design and ultra low interest rates and lax prudential regulation was poured over the Western world by governments, keen to be re-elected by avoiding recession.

From the bureaucrats point of view, though, what’s not to like?

(continued, since it appears to be too long for one post)

I think that Ireland’s policy stance should be based on Chopra’s arguments for decoupling banks from the sovereigns, with pan-EZ deposit and resolution schemes. I don’t know enough about the legal group/subsidiary structures of international banks to know in any detail how to achieve it, but it should be up to each government which has a potential liability in case of a bank failure, to ensure that the FAT/pre-funding scheme is correlated with the liability/potential bail-out risk. It would seem far easier to achieve this with a tax based on consolidated profits and remuneration rather that one at the micro-level based on transactions. With distributed/cloud computing the concept of the “location” of a transaction is fundamentally meaningless anyway.

So, in short, yes to a FAT, no to a Tobin tax.


In practice the banking crisis and the Euro crisis are tightly interlinked, but they need to be decoupled to solve the problem. Within that context a FAT used to pre-fund an EU wide bank resolution scheme makes a lot of sense to me – for example it should work against deposit flight to Germany away from weaker banks (or banks in weaker countries), making them weaker still.

@ Paul McDonnell

You are quite right! However, the link does not work very well.

I have provided above a link to the Taxation Directorate home page on the FTT which gives all the details of the proposal and its genesis.

However, the idea of a FAT is not entirely unrelated and, as Colm McCarthy points out above, is equally irrelevant to the real problems confronting the euro.

@ Paul Hunt

I agree.

@Paul McConnell

Some of the commentors are discussing a financial activity tax which has a different purpose from a financial transactions tax or Tobin tax.

A Tobin tax – a small percentage tax on financial transactions designed to impede excessive speculative trading volume — need not be applied to forex although that was the original asset class. Now such a tax is more relevant for equities which is the new problem and forex is less of a problem. Tobin was insightful in recognizing the problem and suggesting a solution — now the same basic problem (and perhaps the same proposed solution) has migrated from forex to equity markets.

Nowadays a Tobin tax is not necessarily a tax on forex. It could be applied more broadly, but it certainly differs fundamentally from FAT.

Sorry about the circus act – But I am a Dork and I do exactly what it says on the tin.
But seriously we have no rule of law……….. anywhere.

This regulation dreaming is just too much.
They will implode the system and then and then and then………

I have to say I don’t trust anyone.
This is what happens when Imperium collapse – when the abuse has been at such a extreme level Dorks have no trust in anyone or anything.
End game stuff really.
Trust is a precious thing.
They could have farmed Dorks sustainably via Shearing – but we saw the butchery first hand………..

Ah – back in good old days Farmer Bankers had more respect for themselves.

@ CMcC
Agree with you for once.
Now for my piece:
This proposal is half-arsed. You must have everybody on board or it won’t work.
The markets need to be tamed but not like this. First step is strengthening Europe and its democratic structures.
Look at this headline:
Why do we see this as a crisis just for Greeks? Why don’t we see this as a crisis for Europeans who live in Greece?
Let’s push this further.
In order to save Europe from becoming the Fourth Reich we must start to shape it. Build up the democratic institutions first and then take on the markets.

Health care should be a European issue. A European constitution should allow for transfers of funds to states to fund health care. It happens in Canada (federal transfers to provinces) – make it happen in Europe. We, as Europeans, need to find our voices and make this happen.

To hell with this rubbish Franco-German Currywurst of a Euroepan Union – you need the guys that built America to shape the Europe of tomorrow – you need Paddy and Silvio and Hans and all the little people across the continent. It’s time for a pan European political movement (a bit like Libertas only not as scary and less right wing)

@ Paul Hunt

“Something like a Tobin tax is badly needed, but, like climate change policy, to be effective it has to be all or nothing on a global basis.”

How could both be achieved?

@ Paul McDonnell

Given the lack of transparency in the global shadow banking system, given the cross border nature of most of the trade, Financial Transaction Tax is a bit like the egg before the chicken.

Anyhow, this is really a matter for a new Glass Steagal agreed in the context of a revised Bretton Woods the world badly needs .

When the euro goes and the damage created by unregulated shadow bank system, perhaps under the G20, 500 or so reps from the nations of the world effected most by the dangers of currency collapse and currency wars, will be required to be marshalled together, to sort out the financial mess.

Its possible they could agree on a financial transaction tax on a global level and require the declaration/registration and demand accountability for all financial transactions in the shadow banking sector. That would be good! Imagine the sickening criminality and fraud this would unearth, so its not really on the cards for now.

The Tobin tax as pointed out is one targeting currency transitions/speculation

Until the global g20 gets its act together for a new Bretton Woods, we gotta do the sinking and kites like the Tobin Tax and similar canards will be seen for the empty proposals they are. They are empty proposals because the global financial system has corrupted itself having fed on shenanigan deregulation and financial services scams eg IFSC and CT Double Irish and similar in Cayman islands etc financial centres.

From here I’m being ironic:

Perhaps in the context of the Tobin tax or an EMU Financial Transaction Tax, such as it may effect financial institutions such as banks, the ECB can propose to leverage some more from the EFSF to distribute to banks as short term lending to pay for it 🙂

@Gregory Connor

By linking the Commission’s Tobin tax proposals to the December EU summit, you are muddying the waters and inviting discussion on broader financial stability issues, including a FAT. The December EU summit discussions had nothing to do with a Tobin tax, for which the UK has always had a veto, and so this did not form part of the debate/disagreements. Instead the UK brought other aspects of financial regulation into the discussion, and wanted those other aspects to be subject to unanimity (e.g. transfer of powers away from national regulators). Other states saw this as revisiting and changing Lisbon and didn’t want to go there. I think there are plenty of grey areas in Lisbon over which there could be debate as to what is subject to unanimity and what is subject to QMV, but the Tobin tax isn’t one of them.

There are many real and proven problems in the financial industry that need to be solved, but I remain to be convinced that HFT in equity markets is one of them and that it should be a main focus. This made a negligible contribution to the problems that did arise (e.g. the CDO/CDS food chain in the USA, or mad real estate lending in Ireland).

The Commission are proposing a Tobin tax for their own agenda – to get more money for themselves (the EU budget) and to generally promote tax harmonization. Neither of these should rate highly in the list of Irish interests. Jumping onto a German/French led FTT bandwagon would be the wrong solution to the wrong problem in the wrong context and would distract from solving the real problems.

For every $1 dollar traded because someone wants to buy goods priced in dollars $300 is traded to bet on movements in fx prices. Since the sum of all speculation gains and losses in fx is zero. The majority of trades are unsuccessful after transaction costs are paid. These transaction can be considered a burden on the market economy. John Kay (2003) makes the case for a tobin tax.

We are not we , we are the them.
Even if we had a choice in our destiny America is not a good model for Europe.
It is puritanical and they still have much more natural resourses then poor us in the old continent.
They can still afford to make mistakes although less so as they run down their domestic resourse base.
Americas stratergy like ours has always been about running down someone else’s resourse base.
As Europe received more blowback from the New world they turned to their oldest colonies – us for example.
Banking has always been about Windmills ,Tulips & Guns with the first 2 much more profitable until they are not.
Capital creation is a hard business and you can be gamed out of your wealth anyway.
Whats the point of it ?

A very stimulating piece so thanks Gregory. I think the risk of a trading algorithm breakdown is significant and I can t see the point of all the short term trading. I think average time to hold shares in the US is 3 months WTF . So you end up with short term focus which is a disaster for the average quoted company. And for all the frenzied trading the stock markets of the West have not gone anywhere since 2001.

A tobin tax would not have prevented the financial crisis but that is because the crisis is systemic. It will take more than one or two changes to reform the system but doing nothing is not an option since the status quo is unsustainable. The City reaction to the tobin tax is a bit like the Israeli lobby in Congress every time the subject of peace talks come up. I think the City is far too cavalier and downright dangerous for its own long term good .

The other thing about all the flash trading is that analysis goes out the window. it is geared to the players with the fastest connections and most sophisticated systems. The pension fund or small town investor has no chance. But it doesn`t do anything for the market in general.

Correction its easier to make money from Tulips & War.
It just is – the money comes in until the end – then its over.

Tobin was concerned about the casino like characteristics of stock trading on large stock exchanges such as NY, Frankfurt, Paris, London, Hong Kong, Tokyo, Singapore and others. When Tobin raised the issue mainframe and mini computers along with limited data communication were the enabling technologies. Nowadays even four year olds with their Pads have the ability to trade on a world wide basis in real time. Trading has branched out from stocks to a smorgasbord of products that are many degrees removed from reality. In addition trades are being done in milliseconds to capture changes in price of as little as fractions of a cent. It is this gambling den environment that distorts markets as trading models are embedded in computers that trade based on algorithms without human intervention. In simple terms it is a recognise the trend and act on it until it turns. It is close to gambling on horses, dogs or cards and adds no value to society other than enriching or bankrupting the direct participants. The downside from Tobin’s perspective was that it was turning the stock markets into unpredictable roller coasters divorced from the real ups and downs of the economic cycle. Since Tobin’s time economies are much more financialised and hence more vulnerable to gaming to the point where the game is mistaken for reality. Even in Ireland we are experiencing the downside of detachment from reality.

Economists everywhere should be concerned about distortions of economic reality.

It is about time Ireland opted for reality instead of the quick fix fantasies that have got us where we are. The Tobin tax is a good tax and we are unanimously in favour of the EU solution.

Now I have to decide how much to put on Flemenstar at Naas on Sunday.

the problem is it is too late in the cycle for a tobin tax. the financial system is so outrageously leveraged that it cant survive. Politically a Tobin tax will only pull the inevitable collapse forward by a couple of years, and when it does, the politics will say that it was the Tobin tax that cused the whole thing and not excessive leverage.

A better policy, IMHO would be to leave the tax, allow the collapse and then enter with a “this cannot be repeated” Tobin Tax that has widespread support and real longevity.

I believe it to be a side issue but I’m pro-tobin tax. I believe it’ll have little impact on the IFSC. Though one could argue it would. Hence one could argue it’s a significant concession and requires something in return. I can’t imagine how our situation could get worse by opposing it, so that’s were you start.

‘Should Ireland do the right thing as a global citizen by supporting such a tax within the Eurozone..’

That is quaint! Countries don’t ‘do the right thing’ they ‘peruse interests’ which on rare occasion may lead to do them doing the right thing.

The IMF have a paper on FTTs but argue there are more effective ways to achieve the desired policy goals:

An STT is also an inefficient instrument for regulating financial markets and preventing bubbles. There is no convincing evidence that STTs lower short-term price volatility, and high transaction costs are likely to increase it. Current economic thought attributes asset bubbles to excessive leverage, not excessive transactions per se. An STT on derivatives, which have built-in leverage, could have the side-effect of discouraging leverage, but instruments that explicitly target leverage, such as higher margin and collateral requirements, would address the issue more specifically.

More efficient tax measures should therefore be considered before an STT. To discourage excessive leverage at the firm level, policymakers could reduce the debt bias from corporate income taxation and/or introduce a tax on balance-sheet debt such as the FSC. To tax the financial sector, the base of an existing VAT could be broadened to include fee-based financial services, or an FAT could be introduced.

It would be better to choose simpler higher-level solutions to the real problems (leverage, asset bubbles etc.) than trying to fight the war on a battlefield that favours the strengths of banks – i.e. one that involves very complex rules at the micro-level that they can subvert.

Thanks for this topical post Gregory. I will respectfully take issue below.

The putative link between high frequency trading and financial stability is commonly asserted but inadequately supported. The major global financial crises and debacles of recent years have been associated mainly with either fixed/managed floating exchange rate regimes and their breakdowns, or – as we are painfully aware – with the consequences of banks’ overextended property loan books. It is true that the various “casino-banking” SPVs and collateralised securities exacerbated the problems, but this has more to do with over-sophistication and under-appreciation of tail risk in illiquid markets, nothing to do with high trading frequency.

You cite the example of the 2007 credit market wobble, yet you acknowledge that the event was short-lived and could be regarded as an early-warning signal of the subsequent crisis. I’m not sure why you see this as a problem. Similarly with your 2010 equity market example, which as you say, righted itself almost immediately. Your related “what-if” point seems to me to be quite speculative – space is short I know, but you provide no pointers as to how this “enormous disaster” could unfold, beyond “if something else happens”.

More generally, whatever anyone thinks of the problems or otherwise of HFT, we should at least expect to find a HFT-induced “signal”. A simple test would be difference in volatility before HFT (prior to the 80s?/90s?) and after. Alternatively, difference in volatility between contemporaneous markets that have and do not have HFT. My back of the envelope for the US stockmarket and the dollar finds nothing of note. Perhaps other commenters can come up with better diagnostic ideas.

HFT provides liquidity to various capital and money markets, and a lowered cost of transactions. I cannot see why a more liquid market is more of a threat to global financial stability than a less liquid one. Surely the opposite proposition would be more credible.

Supporters of a Tobin tax need to provide real evidence of real economic harm from HFT. It is not enough to assert, as Tobin did, that HFT does not provide economic value – that is for the participants in HFT to judge (which would exclude myself, I hasten to add). If they don’t make money, they will stop.

Finally, there appears to be considerable confusion in the pro-Tobin tax ranks as to what the objective is. As you rightly point out, Tobin saw the tax generating minimal revenue – its main purpose, ostensibly, is more stable markets. But Bill Nighy and Richard Curtis think it will raise “hundreds of billions” (from their website) every year to fight poverty and climate change. And, of course, some simply want to get even with the bankers (even thought the tax will be passed on to the banks’ customers). Which is it, then?

@Gavin K,

Good question, but we risk shooting off on a tangent here. This is about global governance – which has been left to disintegrate in a number of key respects since Fukuyama’s ‘end of history’ and the collapse or mutation of totalitarian communism into authoritarian (or kleptocratic) capitalism. One for another day – or another post.

Gregory seems to be following Rahm Emanuel’s advice to never leave a good crisis go to waste, but Colm McCarthy is correct in his insistence on keeping a Tobin tax and the resolution of the Euro crisis separate primarily in the interests of ‘intellectual hygiene’. The problem is that senior EU politicians, as they scramble to make up for previous and serious errors in the way they treated their voters, and not being noted for ‘intellectual hygiene’, are conflating the two. The inevitable outcome is that they will tarnish, if not irrevocably but at least for a generation in the EU, an idea whose time has come. And all in a grubby attempt to conceal their failings.

@ igsy

‘Supporters of a Tobin tax need to provide real evidence of real economic harm from HFT. It is not enough to assert, as Tobin did, that HFT does not provide economic value – that is for the participants in HFT to judge (which would exclude myself, I hasten to add). If they don’t make money, they will stop’

A casino makes money and employs people. The only trouble is that gambling is a serious economic and social problem, with lots of squalid, hidden externalities. Like sex work, it isn’t enough to say that there is a willing buyer and a willing seller.

The question is not whether certain financial activities make money for those who carry them out. Obviously they do. The issue is the balance of these sorts of activities on the real economy and on society. Given the extraordinarily irresponsible credit bubble activities which underlay the so-called Great Moderation, the notion of ‘contributing liquidity’ is a pretty dodgy one.

‘And, of course, some simply want to get even with the bankers (even though the tax will be passed on to the banks’ customers).’

Indeed they do. We shall see whether bankers are as untouchable as you claim.

@igsy: I presume you have been around a while and have a thorough appreciation of the both the causal factors, and causal processess of our current financial and economic calamity. HFT is not a cause, its a fraud, a scam, which financial regulators know is a scam, yet they are sitting on their hands. You do not need to tax it, just regulate it to extinction.


@ Gregory

one of the main targets of a Tobin tax would be something like the FX market, give its size (trillions of $ of transactions every day) and scope. Another would be something like equity markets, given the push on high frequency trading in recent years, and, again, its sheer scale. However neither of these markets could in any way be blamed for the current problems the world economy is facing. Likewise, for all the uninformed commentary, the vast bulk of derivatives transactions (interest rate, FX, or commodity swaps) could not be blamed for the crisis.

The real problem has been in the world of credit, whether cash or derivative based – government bonds, property loans and credit derivatives (i’m thinking more CDO than sovereign here, but both are an issue) have been the key cause of the financial market instability, but in nominal terms, the transactions here account for a tiny, tiny fraction of total financial transactions. Do 50mio in a government security, via either cash or derivative, and it counts as a big deal. Do that in FX, interest rate, or commodity spaces, and it would barely even register.

The key to this crisis was not wanton speculation per se (and particularly not wanton speculation on equity, FX and IR markets), but excess leverage, too-easy credit and poor lending standards. People lent out more money than they should have, to poorer quality credits than they should have, or created similar exposures through a derivative, and ended up misunderstanding or underestimating those risks. Putting in place a Tobin tax will do very little, if anything, to rectify those problems, and have all sorts of potential unintended conequences down the line.

The method of delivery of the financial missiles of mass destruction using HFT or otherwise given that ‘shadow’ means what it says, low visibility, lack of transparency, is of inconsequential importance to tackling the very visible problems thrown up by shadow banking. The lack of regulation in the financial markets regarding CDO’s and shorting in particular led to the 2008 meltdown which had its origins in investment banking that because of its shadowy nature could not be grappled with by the FED or FOMC. In fact the 2008 was a mere warning. HFT was used at the time to shift the OTC laden books of the investment banks filled with subprime mortgages but HFT was also used to alert other banks to the subprime nature of the toxic OTC. The real problem lies in the financial markets use of paper to virtualise real capital. Checks and balances such as rating agencies were found to have been easily manipulated and useless. Financial paper based on subprime was often traded as AAA. This inevitably is a wake up call on serious shortcomings in the financial markets. None of these problems have hitherto been dealt with. QE has only covered up the problems. Its likely the market problems go a lot deeper than subprime. Arguably the whole area of commodity trading eg in food, energy and metals is a dodgy one. The fundamental flaw is that trading eg in commodities once a certain value upon an asset is virtualised, then ‘the virtual asset’ is switched into a casino chip by the markets. When the financial markets get flooded with enough casino chips each with different underlying ‘real values’, the markets can then be operated and manipulated to alter the ‘real value’ of eg commodities such as food, metals, real estate. Shortages can be created by cornering financial paper; dumping of paper can be used to drop pricing. With tools such as shorting, vast profits can be made at very little cost to the player. I’m guessing Tobin Tax is a small effort to bring order to this chaotic and deregulated ever present danger. But unless the surgery goes a lot deeper, its of little value, creating more problems than it solves. Not wishing to be a goldbug, but floating currencies on floating financial markets are a boon to the financial industry and the markets and the banks, if they can avoid debt traps such as property bubbles. Return to a currency based on real exchange rate value set by a global consensus, is something to aim for, whether that real value is marked at a gold rate, or some other fixed benchmark; this would do more to clean up the destruction, wrought by out of control markets, that make concepts like a Tobin tax derisory; and invite the trouble we are in now.

In theory, this type of tax – if implemented globally – sounds good on the face of it if the money raised were actually used to benefit society (though I would suspect it’s the bank customers who will pay for it eventually/in practice). Who knows? Would need to see some real detail. My guess is that some politicians simply want to raise money from the wrong places. They would be better advised to use their energy on actually solving the real problems.

But let’s take these proposals in their current context – it’s nothing more than a populist PR stunt by a desperate French President who is facing an election defeat this spring. Anyone who thinks it could be successfully introduced in the EZ only is barking or telling porkies.

@Bond Eoin Bond

Any thoughts on the French bond auction this morning and is Italy still above 7% ? Do you think we will see France lose it’s AAA this month?

@ Colm

“HFT was used at the time to shift the OTC laden books of the investment banks filled with subprime mortgages but HFT was also used to alert other banks to the subprime nature of the toxic OTC.”

You wanna explain that one to me?

@ PR

auction was fine, actually pretty decent considering the poor risk environment today. Whether France loses the AAA or not, in and of itself, is becoming less and less of a big deal – its pretty much priced in, and any knee jerk sell off would probably rebound. Would be different if the agencies were seen to be moving onto some of the other triple A’s afterwards that’d be the issue.

@ Bond

The key to this crisis was not wanton speculation per se (and particularly not wanton speculation on equity, FX and IR markets), but excess leverage, too-easy credit and poor lending standards.

That’s a total misreading of the 2008 meltdown in the financial markets….often used to hide the responsibility of the dodgy financial markets for the meltdown in order for them to pull the wool over Obama’s eyes and get him to print more QE to continue the party!

The real problem was the bundling of subprime into Over The Counter Derivatives OTC’s. This was toxic paper the financial markets encouraged and promoted and traded as AAA . The real problem was the financial markets through lack of regulation were using dodgy paper with no means to see through it. If it had those means, the dodgy paper would not have been created, the local bank managers who sold the loans would not have sold them as he knew the loans were dodgy and he would have been left with them and his own bank and job would have been lost. Instead, the dodgy paper slipped by all the checks and balances and became the main part of the portfolio of leading investment banks such as Lehman’s….

I was just wondering if French banks did most of the buying with all that cheap 3 year money they got from the ECB recently or whether they may still be parking it with the ECB. Either situation tells an interesting story… especially if it were only French banks buying.

As I wrote the original entry I knew that elements of my analysis were a bit wobbly but I wanted to put it out there in the blogosphere for comments – sort of a nail soup approach to policy analysis – and there were lots of thoughtful comments. I am supposed to be writing estimation code today for a research paper rather than blogging, so I must be very brief in responding. I agree with Bryan G. that my use of “Tobin tax” is nonstandard since this term traditionally only applied in the case of forex trading but the same Keynes-Tobin policy analysis applies directly to any financial transaction tax (FTT) used for the same purpose in another security class such as equities. In the current global environment Tobin’s analysis is more relevant to equities than to forex since equities is the market which could be subject to excessive, destabilizing trading volumes. I felt comfortable using the term Tobin tax although others might object. Thanks Bryan G. for the reference to the IMF review paper on Tobin tax, FTT and Financial Activity Tax (FAT) who apply the term Tobin tax only in the case of forex trading. Ger, Bryan G. and igsy may be right that HFT poses no substantive danger to financial stability, or they may be wrong. My own view is that we should not bother finding out, since HFT offers so little in economic benefits it is not worth the (hard to measure) risk to financial stability. John Ryan, John Foody and Wow poo-pooed my call for Irish global citizenship and doing the right thing but I did not mean it literally in exactly that way. Ireland could improve its reputation for economic prudence by being on the right side of the HFT and Tobin tax debates, after sullying its reputation through lax financial regulation in the bubble period. So being a good global citizen in this regard is in the state’s long-term interest. I agree with Colm McCarthy, Paul Hunt, Eoin Bond that the EU political establishment has tried to link HFT and the need for a FTT to the last financial crisis and this is totally unjustified. My blog entry was about a future financial stability problem not the ongoing Eurozone crisis. I do not want to contribute to conflating HFT and STT with the current Eurozone crisis which is unrelated. I agree also with these authors and Igsy that the attempt by the EU commission to use FTT as a source of EU commission funding is a potentially disastrous drain on the EU economy. RV and Colm Brazel both make a really good point about financial engineering methods that could be used to avoid a Tobin tax (such as equity swap contracts) and I have no immediate solution. I also take RV’s point that there might be other more direct methods for dealing with HFT-induced instability such as forcing all trades to go through exchange clearing houses and putting in place reliable price change triggers for short-term trading freezes.

@ All

The merits or demerits of the FTT can be discussed ad nauseum. The discussion would come to no particular conclusion. The Commission proposal, on the other hand, is being actively discussed in the Economic and Finance Committee of the EP (of which Gay Mitchell is a member) and it will come to a rather obvious conclusion; the necessary unanimity for adoption of the proposal does not exist.

The proposal on the CCCTB is being discussed at the same time with the likely same result.

The Commission cannot be faulted for doing its job which is “to promote the general interest of the Union” (Article 17.1 TEU). This “general interest” is to be found in the provisions and objectives of the treaties, but action by the Commission is now subject to a strong subsidiarity control, including by national parliaments i.e. if any party thinks that there is no justification for a proposal by the Commission, there are now procedures for this to be discussed.

It would be difficult to find a basis for objections in this instance, especially in relation to the proposal to use the funds raised by the FTT as an EU “Own Resource”. The treaties are unquivocal in relation to the obligation for the Union to “provide itself with the means necessary to attain its objectives”. (Article 311 TFEU). The Member States, unfortunately, have been refusing to do so and the budget is now largely funded by national budget contributions with a complicated system of rebates for those countries that think that are paying too much (or, rather, those who succeeded in persuading others that this was the case, to wit; the UK, followed by Germany, the Netherlands, Sweden and Austria).

This is the background to the current manouevres as a new multi-annual financial framework has to be negotiated by 2013. The UK has a veto with regard to the nature of the mechanism underpinning its rebate.

The fundamental concern at this time should be the evident lack of any political willingness to compromise demonstrated by the three main capitals at a point of extreme delicacy in the fortunes of the EU. The competition for the honour of “man (or woman) of iron with the wooden head” is still wide open.

@ Gregory

“Bill Clinton might have been able to pull it off in terms of getting the US on board for a Tobin Tax — or Jimmy Carter before him. Why not Obama? He needs a bold policy initiative pre-election. The Republican opposition will have trouble claiming that the HFT industry represents the “working class” interest. You are right I admit it is a long shot but why not at least an attempt?”

William Phelan is absolutely correct when he says that there is zero chance of America or the UK for that matter agreeing to a Tobin Tax. There is no way any leader in America or the UK could pull it off because whether it happens or not is not related to popular opinion. It is related to the lobbying power of those who oppose the Tobin Tax and they have deep pockets. Boris Johnston recently said that the Financial industry paid 53 billion in taxes in 2010 to the UK government. That is huge lobbying power.

My guess would be it is many times this amount in America.

The Shadow banking industries in Wall Street and London are a massive competitive advantages to both these countries. They skim cream from real industry profit and add no value and keep lots of it for their employees.

Turkeys do not vote for Christmas.

A bit like Glass Stiegel or allowing banks fail, a Tobin Tax is an obvious measure to minimise future banking crises.

Is it in Ireland’s short term financial interest? arguable.
Is it the right thing to do in any country in order to make democracy stronger? Without doubt.

Why is it when it comes to the financial industry right and wrong is consistently sacrificed at the alter of pragmatism? Cos these guys are above it and everyone knows it.
Why was it that there was wide scale applause in the Euro parliament recently when Baroso announced they were going to endeavor to introduce a Tobin type tax? It’s because politicians know that undemocratic powerlessness they feel when dealing with the financial industry is not in the interests of them or their constituents and anything that curbs that is a good thing.
But Will a Tobin tax happen?
No chance in the vast majority of the world. Very small chance in parts of central and northern Europe.

@ Colm

Why were CDO’s so toxic in the end? Because the underlying loans were terrible, whether through negligence or outright fraud.

Spanish and Irish banks had virtually no exposure to CDO’s, yet have suffered massive losses too. Why? Bad lending and too much leverage and reliance on wholesale funding.

Holders of Greek debt will take losses not as the result of CDS or virtual paper, they will take losses because Greece borrowed too much and lied about the real state of its finances, and because there was an assumption that government bonds don’t default. We are seeing this spread into other government bond markets, for similar though less acute reasons.

Poor credit standards and excess leverage underlie all of this. Fix that first. The casino starts with the basic slot machines at the front door, not that high stakes poker table down the back. You can lose just as much on the former as the latter if you give it enough time.

And please, elaborate how HFT impacted on the sale of OTC subprime derivatives?

@ Bond

“You wanna explain that one to me?”


“High-Frequency Trading by Volume and Volatility
The Aite Group, LLC claims that high-frequency trading (HFT) accounts for 73 percent of U.S. equity trading, despite making up just two percent of trading firms. The TABB Group has a slightly lower number. TABB claims that between January and July, high-speed trades accounted for 53 percent of U.S. equity trades.
But you get the point. Despite which numbers are correct, HFT is making up the majority of stock market transactions in the United States.
According to TABB, HFT volume increased to an average of 65 percent in the first 11 days of August, and hit a peak of 70 percent on August 10, when the Dow fell almost 520 points.
On August 8, the Monday after the U.S. downgrade, the Dow plummeted 635 points. Volume on the New York Stock Exchange was fourth highest on record. High-speed traders profited as many investors lost big.
TABB estimates record profits of $60 million on August 8. The profits for the rest of the week ranged from $40 million to $56 million. High-speed traders were said to have profited on the market’s high volatility and volume by moving in and out of positions in a matter of milliseconds.
Is High-Frequency Trading to Blame?
Anytime trading firms are making millions while the majority of investors are stomaching losses, it’s going to generate attention.
People are also naturally scared of new technology.
Some blamed those new-fangled computers for exacerbating Black Monday in 1987. Back then, algorithms were as simple as, “If the stock price drops to $50, sell.” In theory, this certainly could have exaggerated massive sell-offs that may not have been possible before.
But proponents for high-speed trading claim that it brings more liquidity to the market while keeping transaction costs low. A study released on Monday by the Capital Markets Cooperative Research Centre of Australia suggests that HFT does indeed bring these qualities to the markets.”

Me, I’m all for new technology. HFT is not the problem. The problem is with the paper casino chips/derivatives traded and the lack of regulation and legal framework for these markets.

@ Colm

not one mention of subprime derivatives or credit based products in that HFT copy n paste. So you basically haven’t a clue what you’re talking about re:

“HFT was used at the time to shift the OTC laden books of the investment banks filled with subprime mortgages but HFT was also used to alert other banks to the subprime nature of the toxic OTC.”

You frequently come on here telling all and sundry how stupid, insane, inane, childish, idiotic or niaive some people’s comments/opinions/articles are. Perhaps a little less venting and a little more research is required.


“Why were CDO’s so toxic in the end? Because the underlying loans were terrible, whether through negligence or outright fraud.”

So, you think financial paper such as CDO’s based on subprime that allow value based on negligence and outright fraud, should not be banned and overhauled 🙂

But rather people should be educated not to abuse CDO’s 🙂

Perhaps one should not use a sieve to carry water 🙂

The FTT as proposed is bonkers, in terms of scope of applicability, and of rates. At the proposed rate of 0.1% on cash transactions, it will render utterly illiquid both bill and repo markets.

The rate proposed is 50 times greater than that imposed by Sweden in the 1980s on sub-90 day transactions, and 33 times the rate imposed on 90+ day transactions. The Swedish experience was a sharp decline in both activity and liquidity, and a significant loss of other finance-related tax receipts such as CGT. The tax brought in under 4% of projected revenues.
Interestingly, Sweden is one of the most vocal opponents of the proposed tax.

The FT today reports that Sarkozy is pushing on with plans to introduce the FTT unilaterally in France, ahead of the April elections. This, if successful, should provide plenty of amusement for onlookers. If it makes little sense in a pan-European context, it makes still less sense for one country to attempt it.

@Gregory Connor,

Many thanks for the considered response to the comments in this thread. You are setting the bar very high for your fellow contributors 🙂

I fully understand and appreciate that you and your fellow contributors incur a high opportunity cost when blogging and engaging here.

Re the topic, I think Colm MCarthy and Mr. Bond are hinting at a more important point. We should not confuse or conflate taxation of financial markets with effective and efficient governance of financial markets. I am not accusing you of this, but there is a tendency of the progressive-left, when they see what they perceive as ‘bad things’ going on, to use taxation as the instrument of choice. Taxation is only one weapon in the armoury of governance. Sometimes it should be the last to be used. And, in addition, we do not seem to have the system of global financil governance in place to implement any form of a Tobin tax effectively.

@ Bond,

Re “So you basically haven’t a clue what you’re talking about ”

Look, I bothered to research the evidence to back up my point there. You are choosing to nitpick argument over HFT that if you read my original post you would see I negate importance to the point of irrelevance.

You’ve made these childish ad hominems in the past. Anything that conflicts with your myopic tunnel vision you consistently attack with troll like vehemence.

Its a position you take when you lose the argument on a rational level and want to reduce it to your childish invective?

Don’t wish to debate with you at a gombeen level, so perhaps we can both just argue the points, examine the evidence and try to be a little less personalised as well!

By the way, I’m all for ad hominem if the merits of an argument deserve vitriol directed at someone’s accountability for dreadful decisions or policy. This upsets you. I know 🙂

Anyways, here’s some more refs on the MINOR point re HFT made above:

Here’s response 2009 to High Frequency Trading and ‘flash orders’ efforts to curb back in the day 2009

US equity trading High Frequency trading at 61% all trading in 2009 see chart here:

he’s a bit of a ranter but he makes some convincing points especially evidenced in his charts

need for regulations to register all trades on exchanges

I’m making a supposition that a huge amount of the trading in stocks and shares in the days coming up to the shadow banking disaster that left the investment banks holding the bag of OTC’s that brought down the investment banks, that at least 50% of this trading was done with HFT.

Note perception of the value of OTC’s has a huge impact on stocks/shares etc elsewhere and therefore its impact on HFT.

Interesting charts above re HFT manipulating the commodities metals markets.

@ Colm

you stated quite categorically that HFT was used in the subprime derivatives game. It wasn’t and indeed it can’t, and to think that it can shows that you don’t actually understand what HFT is and what it is used for. It is chiefly used for commoditised or near commoditised securities (FX, highly liquid commodities, high volume equities, equity indices), whereby HFT bots are constantly nipping in and out of the market just before ‘real money’ or cash buyers make their transactions. They make money not via speculative bets (and therefore they have nothing to do with “casino banking”), but by near-arbitrage like conditions, by buying and selling almost simultaneously. The core aim of HFT is, in fact, to avoid volatility and make money via bid/offer or arbitrage.

The chief concern about HFT is that while it does add liquidity to the market, which both the exchanges and big institutional players want, it is taking away that first cent or so of profit from real money buyers, in fact adding indirect costs to investors which outweigh the direct savings that abundant liquidity offers initially. The flash crash showed the danger that HFT can create in certain extreme conditions, but i think its highly debatable that HFT has played any part in this current crisis (subprime, banking or sovereign). It is a broader issue about the potential for it to exasperate panic in certain conditions, or of whether it is an inherently unfair practice that acts as a toll or tax on real money or retail investors.

On the CDO’s – of course the should be overhauled and their regulation significantly strengthened. And i wouldn’t even be too worried about a ban on them being in place. but every CDO started life (even if as a derivative of a derivative) as a crappy loan or mortgage, given out in real money for a real (or allegedly real) asset, by a real person to another real person. You need to change the behaviours at the bottom to have any true, lasting impact, but this is, obviously, boring to talk about and does not have Darth Vadar or Death Star like bad guys to wheel out in the open.

it may be a good idea to stop publishing the ravings of the Dork, you may be damaging the credibility of your site, and there are not a lot of cyber Eire places for the ‘Nyberg Contrarians’ to be heard….

@ Bond,

“you stated quite categorically that HFT was used in the subprime derivatives game.”

This is really getting tiresome. You don’t read my posts or evidence I gave above. You deny my contention and the evidence.

Really, there’s little more I can say. The writers I cite all make the point that volatility regarding subprime led to the meltdown in 2008. I’m not talking re trading in OTC’s directly, this is so unregulated you can do this by phone on word of mouth..but on the volatility created in other market exchanges eg COMEX that doubts around investment banks and OTC’s can generate and be exploited by HFT.

This volatility provides the hunting ground for HFT type trading. I notice you qualify your phrase with the word ‘chiefly’ re

“It is chiefly used for commoditised or near commoditised securities (FX, highly liquid commodities, high volume equities, equity indices), whereby HFT bots are constantly nipping in and out of the market just before ‘real money’ or cash buyers make their transactions.

No, its not, you need to do more research yourself:

“The case was far from isolated, say traders. CME Group, the Chicago-based futures exchange, is investigating a case this month where a trader in “mini” S&P Index futures contracts “inadvertently traded approximately 200,000 contracts as both buyer and seller”.

Last year, the London Stock Exchange suffered a three-hour outage after its trading system collapsed under the strain of a huge volume of orders. Some traders blamed the spike in volumes from algorithmic trading.”

HFT is used extensively in the paper based futures commodity markets, see the charts and links you ignore in my previous post.

Re “you stated categorically…” For your own purpose to mislead you misinterpret as well to suit your own false interpretation.

I’ve merely described the commonly held and accepted view that HFT eg in the commodities eg the metals markets, I can show you chart examples in the notorious COMEX market, is used to manipulate pricing of commodities.

My point is that HFT exploits volatility for profit. This is generally accepted to the point of view flash trading and other practices are being currently looked at re regulation and overdsight, whether they come from trading houses using inhouse algorithyms or the bots you mention..

But, don’t take my word for it, read the links!

Re changing behaviour at the bottom, the way not to change behaviour is to give out free whisky to the indians, or paper OTC subprime sieves that cant carry value, or straight up 100% mortgages to dodgy bets.

It seems strange, and here I am being generous, that there are people who oppose the Tobin tax as a distraction from larger issues with managing international finances and yet would be entirely comfortable focussing entirely on lower level economic issues in Ireland (such as, lets say, collective bargaining agreements) as opposed to the issues of the bond holder bailout and financial sector capture of European policy.

@Paul Quigley deals nicely with @Igsy’s defence of the imagined benefits of financial innovation. Let us make the first principle of international finance “First do no harm” from now on.

@Gregory Connor

Ireland could improve its reputation for economic prudence by being on the right side of the HFT and Tobin tax debates, after sullying its reputation through lax financial regulation in the bubble period.


The Tobin tax is an attempt to improve market stability and even if it is not a complete solution it can be the all important first step. After Tobin we can focus on more long term regulatory approaches. Obviously if the EU implements a Tobin tax there will have to be some kinds of capital control implemented to stop all business moving to another jurisdiction and there may also have to be “carrots”. Long term the aim is to reduce the level of market activity to be a reflection of real and productive economic activity and if that results in the IFSC shrinking then so be it.

@ Gregory Connor

Obama needs to concentrate on the middle class issue.

If he put forward this proposal, the Republicans would blame him for poor stock prices.


You mention several countries regarding the EU budget and their demands for rebates etc.

Assuming your Irish, isn’t it a bit rich to be criticising others when we are in the 40th year of a free ride?

@ Colm

“My point is that HFT exploits volatility for profit”

No. It doesn’t. Jesus wept when he read that. There’s a difference between HFT and algo. They interact, but are decidely different. The HF part of HFT are the clue.

Would it be possible for one of the Mods to add a Topic on the exchequer returns.

The silence in the media is deafening.

1. Deficit goes from 18.7 to 24.9 billion largely due to bank recap in July and promissory note payment.
Any more bank recaps planned/likely for this year?
2. Health expenditure up 1.3billion on last year.
Is the increase due to lump sum pension payments?
Loads more too.

There is virtually zero chance of an EU wide FTT. The Brits are opposed and so is Sweden. As regards an EZ solution, you are probably correct that there would have to be capital controls. However that would be contrary to the single Market. As We probably need the single Market, we should oppose a FTT.
In any event, all leftie can stop salivating and righties can stop frothing at the mouth. The FTT is all but dead.

@Shay Begorrah

“and if that results in the IFSC shrinking then so be it”

Steady on there now! Some of us rely on it for 50% of our income 🙁


However that would be contrary to the single Market.

I was more thinking of capital flows between the EU and other jurisdictions.

How to get the UK on board is a tough one but a properly calibrated FTT can be sold. Remember that it does not have to be large initially and that though the Tories are in hock to the City of London they might not be averse to another revenue stream (perhaps they could get it through it a “rebate”) if they could put the blame on those dastardly French.

Good regulation can be made to spread.

@PR Guy

Steady on there now! Some of us rely on it for 50% of our income

Many of the talented individuals employed directly in the financial sector can usefully be put to work elsewhere, perhaps in salt mining, and a talented PR person like yourself will find new customers in the businesses activities no longer being “crowded out” by having to compete with the financial sector for talent and investment.

Gander, meet sauce.


There are a few ‘talented’ individuals in this sector I would like to consign to the salt mines myself.

@ Michael Hennigan

Free ride?

An aspect of the deepening and widening of the scope of the EU since we joined was the the introduction of a policy of economic and social cohesion which is not based on giving any country a free ride but to compensate for the inherent risks to less competitive economies of opening up their markets. It is not charity but a political deal. The risks turned out to be all too real in Ireland’s case and the net funds transferred have been eaten up by the housing and banking bust.

Ireland also had the good fortune, unlike the Mediterranean countries, to be a net beneficiary from the Common Agricultural Policy.

In neither area has the country benefited from any special deals. The arrangements that apply have to apply equally across the EU. It is, therefore, hardly surprising that the biggest percentage beneficiaries are Greece, Spain, Portugal and now Poland and the countries of the former Eastern Europe.

As regards contributions to the EU budget, these should also be based on EU wide criteria. The problem with regard to the countries mentioned is that these criteria have been bent because the countries, starting with the UK, claimed that they faced and unreasonable budgetary burden. Ireland has never made any such claim for the obvious reason that it was a net beneficiary but that situation is now changing. Who knows what will happen?

Incidentally, Germany pays only 25% of its assessed share of the cost of the UK rebate, the balance being picked up for the main part by France, Italy and Spain.

The UK, even with its rebate, has always been a major net contributor to the EU budget. The question of the UK contribution remains a political hot potato, both at EU level and domestically in the UK. Bearing in mind that overall EU expenditure is only about 2% of overall government spending across the EU, the dispute is about who benefits and who pays rather than the absolute sums involved.

But that is enough to be getting on with.

There is not a chance the US, UK, , HK, Singapore, Gulf will ever come on board. So it is a Europhile wet dream.
Salt mining. Scratch a Social Democrat and you find a Beria.

@ All

A very interesting interview with Monti in Le Figaro who is seeing Sarkozy tomorrow and who is frank in his support with regard to (i) keeping the UK on board and (ii) sticking to the Community method. In other words, disagreeing fundamentally with the course of action that Sarkozy is attempting to pursue.

Sarkozy, in going public with a stated intention to introduce a FTT in France alone if necessary while the present government is still in a position to do so, suggests that Germany is not ready to join in such an escapade simply to allow Sarkozy to wrong-foot Hollande. It also is a further confirmation of the erratic nature of the conduct of French policy.

The working group, all 100 members strong, drafting the new intergovernmental treaty also meets again tomorrow. It should be fun!


There is not a chance the US, UK, , HK, Singapore, Gulf will ever come on board.

Au contraire my worried little capitalist I suspect that the financial sector is about to find out that, in more or less the words of Ha-Joon Chang that there aint no such thing as a free market.

@Gavin Kostik
Thanks for the link. Got the answer but not the one any Irish person was hoping for.
The fact that the tax receipts is dead flat after the cumulative increases in income tax and VAT in 2010 is very depressing.

The one armed bandits are always rigged in favour of the house. This is precisely why there will ber no FTT in your lifetime. I would say the CEO of BNP is already talking to Sarkozy and telliing him to cool his jets or face disaster in the Prez Election. Sam e in Germany. No Pol is going to get a friendly loan of 500k of the nearest bank if this goes through.

Forget the USA as well. This is election year. Moreover in the UK, HMT is long bank stock and a willing seller at higher forget anything that damages profitability.


RE ” There’s a difference between HFT and algo. They interact, but are decidely different. ”

Clearly you disagree with myself and the sources I pointed to, so that makes you a bit of a slippery goblin manufacturing definitions to suit your argument.

Its an arrogant assumption to point out to me there’s a difference between HFT and algo when I never made any allusion to a connection between them both. But, since you’ve made the connection, lets examine if what you say is true:

“A special class of algorithmic trading is “high-frequency trading” (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe. This has resulted in a dramatic change of the market microstructure, particularly in the way liquidity is provided.”

Oops, even plain old vanilla wikipedia disagrees with your mistaken assumptions.

Clearly you need to look beyond your bond desk pressing the happy buttons and spend less time trying to deflect attention from shadow banking and the bond markets.

Perhaps pour less of your criticism on loan recipients rather than lenders/financial markets exploiting them? Doubt that.

Gotta leave this topic, so I’ll leave the last word to you 🙂

Shouldn’t go without congrats to Greg on his post and hope it spurs his interest further in the shenanigans of the financial markets.

@Tull – the proposed FTT wouldn’t simply be a matter of impinging on bank profitability and, in fact, that would be one of the more minor effects of its introduction.

It is, I believe, guaranteed to cause total seizure of money and bond markets by reducing liquidity by an unconscionable amount. Take, for instance, an April -maturing French T-Bill. It is currently priced to yield 0.21%, and is a liquid, near-cash item for any holder. For the French government, it is a cheap and flexible form of funding, of which it has been availing since God knows when.

Post-FTT, any holder looking to sell that Bill would, with a 0.1% flat taxrate imposed, be selling an effective yield of 0.43% – more than double the current yield.

The buyer, on the other hand, would also be liable to pay 0.1% tax as well. This reduces the yield to the buyer to -0.01% – a negative return.

Net result? Deal doesn’t happen, no tax raised. Other effect? Well, the normal buyers of T-Bills are banks, and they buy them precisely because they represent near-cash, and can be realised in a trice should circumstances so demand (be those circumstances deposit outflows, rising loan demand, or a change of view on the likely course of short-term rates).
As they are, under a FTT regime, no longer liquid, the buyer will naturally demand a higher return on initial purchase. Cost to French government is an additional 20bp on its short-term funding.

The FTT does however distinguish between cash transactions and derivative transactions. It does so in an unusual way, though. It proposes a tax rate of 0.01% on these, or one-tenth of the cash transaction tax. What’s your best guess as to how this differential might impact on investor behaviour? Is it really the intention of the proponents of the tax that investors/banks/speculators or whatever will be driven into increasing their derivative exposures at the expense of their cash exposures?

And it’s kind of odd that the repo market, used by the ECB as a conduit for transmission of its monetary policy, will also be liable to the tax. With the only lending that’s occurring between eurozone banks being secured lending, via repo, how the heck is this not going both to destroy monetary policy transmission AND destroy what’s left of the banking market?

The FTT will cause, in practice, such a systemic shock to the normal operation of money markets that it could only be welcomed by those advocating utter anarchic catharsis as a solution to the current mess.

Needless to say, it won’t bring in the €57bn being mooted, though it might end up costing that to put right the damage it will cause.


Re “obvious reason that it was a net beneficiary but that situation is now changing”

Yep, this has changed big time. The amount owed re bailouts clearly outstrips by far any hitherto net gains made in the past.

Would be interesting if this were fully charted to compare exact figures.

I remember when the SOX-legislation was introduced. When it happened there were people who claimed that I had to change the fonts in my e-mails because standardised fonts in e-mails was a SOX-requirement 😀

Since that happened I’m very sceptical to changes that are introduced in connection to something that is indisputably needed 😉

A lot needs to be done in the area of financial regulation. A Tobin-tax does not strike me as something that has to be done. Maybe I’m wrong so:

About this quote:
“If HFT generates a flash-crash at the end of the trading day, rather than mid-day as on May 6th, and something else goes wrong at the same time, it could lead to an enormous disaster.”

What would the enormous disaster be?

The thing I think Ireland should push for is a bank resolution regime. That would be the right thing to do & I think that outside of EU-institutions that Ireland would find many allies. Wouldn’t a bank resolution regime have the added possible benefit of Ireland not having to pay back unsecured creditors of failed banks?

This is a very poor post – filled with claims which are either downright false, are vague or have no proof. It is clear that Gregory Connor knows little or nothing about the financial industry, trading or market mechanics.

“Hypercompetitive securities markets with excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability.”
Says who? Could you quantify “excessively-large trading volumes”? You realise the well established correlation between volumes traded and spreads (which results in lower “slippage” for everyone).

Have you a single example where “excessive” exchange trading volume of a symbol CAUSED global financial instability?

“Although the quant-trading markets calmed down after about two weeks, many analysts now recognize this as an early warning signal of the subsequent global credit crisis.”
What is a “quant-trading market”? How did the “non-quant-trading markets” (whatever they are) perform at that time?

“High frequency trading (HFT), using entirely computerized systems to trade at hyper-second frequency, now constitutes 70% of US equity and equity-related (equity baskets, futures, options) trading volume, and 30% in the UK.”
These numbers are simply false.

“He saw that most of the trading volume in forex markets provided very little economic value.”
Forex has the tightest spread of anything traded because of the volumes. This provides huge value to global commerce.

“HFT has hijacked this and feeds off this market cost improvement (and by earning net profits from ‘normal’ market traders) with trading systems that add little real efficiency improvement for markets.”
What are “normal market traders”? I really doubt you know what you mean when you use the term “market efficiency”.

Market efficiency is quantified by spread and markets where HFT firms operate have the lowest spreads. On the other hand, the markets which restrict HFT (either through lack of technology or by deliberate policy) have terrible spreads.

“How would a Tobin tax impact the competitive draw of Dublin for its brand of ‘off shore’ financial services?”
You don’t know but yet you are happy to advocate it as sensible policy for the country? It would decimate the IFSC. Ask the Swedes how it worked out for their financial industry.

“Asian markets (which are not yet competitive for HFT) might be willing to cooperate as well, since there is no great cost for them.”
Oh really? All of the major Asian exchanges have HFT participants. You’re really just making this stuff up.

You probably have some skin in the game but you are in civilised company now with people who are not emotionless.

Conducting FX through banks is a costly proposition. For amounts over a few thousand there is a manoeuvre called Norbert’s gambit. Buy a stock interlisted in countries A and B. For example buy XYZ with Euros in Frankfurt and after checking your account to ensure the transaction is completed you then sell it in New York and have the proceeds deposited in a US dollar account at your EU bank. Voila Euros become dollars with extremely low transaction costs compared to banks rates.

Those of you who complain about a Tobin tax affecting FX should know that Tobin was talking about a fraction of one percent as being sufficient to curb recklessness. Since banks charge a transaction fee plus up to 3% of the amount transacted I do not see how a Tobin tax would curb FX transactions for the ordinary person or business. It would affect the speculators doing hundreds of transactions per minute involving millions per transaction.

The EU has the critical mass to make the Tobin tax stick in the same way that it has imposed a carbon tax on international air travel. We should not forget that the Tobin tax is a relatively painless way to curb recklessness (gambling) on exchanges. Remember LTCM, Lehmann Bros, AIG and many others.


We have had a Tobin Tax on the largest asset market in these Isles for years nay decades perhaps you may have heard about it – its called Stamp Duty.

Yes indeed a small tax levied on transactions of a non wasting asset variety for the purposes of paying for the Stamping office to administer the contracts and charges against those non wasting assets as they change hands.

Now perhaps I’m being very silly but did this transaction tax make one iota difference to the largest non wasting asset market known to man i.e. the property market. The answer as we all know is no. Did this transaction tax prevent wild speculation and induce the craziest asset bubble across this Island since asset bubbles were first recognised – in a word no.

Please folks this is just more dung upon the ever rising dung heap of EU solutions to a basic problem. The problem being the property market has been mispriced and until that mis pricing error is reversed and the banks and their financiers suffer severe looses as a result more daft ‘solutions’ such as this will come to these shores. We should resist the temptation to even debate this nonsense.

The problem is too much f*c*ing debt – especially of the private variety. I’d sincerely wish the EU and their voice masters would deal with the real issue and not inflict these dead end kites on the rest of us. End of.

“High frequency trading (HFT), using entirely computerized systems to trade at hyper-second frequency, now constitutes 70% of US equity and equity-related (equity baskets, futures, options) ”
But you didn’t elaborate on the real rationanale behind such trading, and the use of such trading to effectively commit massive fraud.

Eoin Bond at 1:04 above explains the rationale clearly but he doesn’t see this as a “criminal” issue:

from Eoins post re HFT:
“It is chiefly used for commoditised or near commoditised securities (FX, highly liquid commodities, high volume equities, equity indices), whereby HFT bots are constantly nipping in and out of the market just before ‘real money’ or cash buyers make their transactions. They make money not via speculative bets (and therefore they have nothing to do with “casino banking”), but by near-arbitrage like conditions, by buying and selling almost simultaneously. The core aim of HFT is, in fact, to avoid volatility and make money via bid/offer or arbitrage.”

This is essentially correct I believe but what is missing is the modus operandi. The “bots” are the “bots” which are responsible for the trades ordered by clients particularly those making large trades. These bots are now told to the limit which a client has set on his “buy” or “sell” so the HFT is designed specifically to discover this information e.g.

The following is my understanding but I’m open to correction and clarification of the exact method:

Say company X is trading at 2.5 dollars on present market prices.

A client wants to sell say 2m shares of X and enter his limit order i.e sell 2m shares X and not below 2:25. The order is sent to a e.g GS controlled “bot” for execution the limit of 2:25 is not sent to the bot so it should make an attempt at sale and inform the originating system. The originating system will accept only the share sales above or at the limit and reject the rest. That’s the way it should work.

This is where HFT steps in to “discover” the clients limit. It sells small tranches of the shares at high speed at various prices starting at the market price and reducing each time. It soon discovers that the client is prepared to sell at 2:25 and this is the price which the client gets for the vast majority of shares. The owners of the “bot” pocket the difference.
GS is reputed to make 100s of millions of dollars per day!

I think Eoin is being kind to suggest that this is arbitrage. It is known as “front running” I believe and is banned on the traditional “floor” of the stock exchange. It is fraud pure and simple and if a FTT can stop it I think companies will move listings from exchanges where fraud is allowed and where clents are ripped off daily to those where it is prevented.

It really is time to curtail activities which contribute nothing useful to a normal functioning society.

“These bots are now told to the limit..”
should read:
“These bots are not told to the limit..”

makes quite a difference sorry

maybe the proceeds from a Tobin/ fat/ftt/etc. tax could go to a few control engineers to try understand the systemic risks from hft and all the other ills such as how in the eurozone a bank going bust is an apocalyptic event signaling Ragnarok, yet in the USA or Denmark, tis grand.

Also regarding Fiscal Discipline, I was talking to a lady who works for the EU in Luxemburg this xmas. She doesn’t pay any income taxes (or even vat or excise duty on drink bought in Kirchberg, lu) Her husband working in the same place, but not for the eu pays lu taxes.

I wonder do those boyos on Dawson St pay paye here???

@ Amac

you have a fair point about that type of HFT, call it information arbitrage if you will, which is morally questionable, though legally it appears to be kosher or ‘grey’ at worst. However, because of the outcry, i think most platforms do not give out this sort of information anymore (they used to actually provide it to big users). But my basic point still holds – HFT has almost nothing to do with volatility and is an arbitrage type trade.

@Bond Eoin Bond

“HFT has almost nothing to do with volatility and is an arbitrage type trade”

That’s certainly my understanding. It is looking for sufficient enough difference (no matter how small) to make a sizeable enough trade make a reasonable return (define your own parameters) – and doing it lots of times 24/7/365. Volatility that’s already happening in the markets may open up opportunities for HFT e.g. on a busy day and some systems are labouring, if changes in London are not happening within 3 nanoseconds of changes in New York it creates an arbitrage opportunity – a tiny little window – for a supercomputer in a dark room somewhere to nip in between nanoseconds 2 and 3 and turn a few bucks.

I haven’t kept up with this element of the debate on this thread (so apologies if it’s already been said) but I guess there are some people who would say that lots of platforms ‘doing HFT’ at the same time could potentially cause some volatility. The jury is probably still out on that. I recall an instance last year on the NYSE when there was a ‘flash crash’ of some kind but I don’t think anyone ever pinned that down to HFT though there was a lot speculation about it being the cause. I forget what the subsequent investigation found but I don’t recall anyone shouting from the rooftops that HFT had to stop or the world was going to end. I’ve no idea whether they’ve managed to improve circuit breakers of some kind to prevent flash crashes happening in the future (I doubt it).

It’s just another example of emerging uses of technology as far as I can tell. I was under the impression that automated trading to one extent or another was becoming the ‘new normal’. Even people doing day trading at home have rules based systems available to them for a few hundred $ that can automate it all for them. Not all spread betting platforms accept them though.

Whenever I think about HFT I invariably think about John Connor and The Terminator films. How sad is that?


I hadn’t come across ‘front running’ before. Thanks for the info. Interesting. I wonder if external auditors check for that sort of practice?

Who mentioned GS? I didn’t mention GS!

@PR Guy
“I hadn’t come across ‘front running’ before. Thanks for the info. Interesting. I wonder if external auditors check for that sort of practice?

Who mentioned GS? I didn’t mention GS!”

Who else but Max Keiser – both GS and HF front running are old hobby horses of his and since he worked in wall st he has a lot of inside kbowledge about what goes on there.!

The typical HFT (well, actually I only know one HFT from the inside but have some newspaper type reading on others) uses very sophisticated algorithms so it gets really complicated. These guys are serious computer scientists building complex models. So with all that complexity comes the risk of unk-unks. I think Bond, Eoin Bond above makes it sound too simple and risk-free whereas I see the possibility of negative-feedback loops of unknown form creating crashes of unknown size.

@ Gregory

“These guys are serious computer scientists building complex models.”

Oh yeah, lets not pretend these guys have anything to do with finance or economics, but then much of modern ‘banking’ no longer has anything to do with those either. These guys would be in Intel, Google or NASA if they weren’t in a HFT.

I agree there are some potential “worries”, but i think it would be hugely wrong (and without much substance) to tag HFT as being inherently a ‘bad’ thing. HFT has the ability to amplify other problems (ie a systems, platform crash), and there are no doubt some parts of it which are morally dubious (front running etc). But there is nothing wrong with HFT in principle.

@Bond. Eoin Bond

I agree that there is nothing wrong in principle with HFT but I cannot see where is their real economic-value-added. Tobin might claim that a sufficiently small tax would drive out the low-value-added trading while leaving most of the liquidity-value-added trading. I can’t speak for him obviously but I see his theoretical point and its applicability to this potential problem. What about the May 6th flash crash? It would be best not to repeat that type of scenario.

@ Gregory

For all the problems in the world, flash crashes are probably the least of our worries. Was there any lasting damage from the flash crash? And, as i pointed out above, and as detailed below, the crash was actually caused by a “bog standard mutual fund”‘s automated order, not HFT (algo and HFT need to be considered seperately regardless of what wikipedia informs the masses).

“I agree that there is nothing wrong in principle with HFT …”

Here’s a better explanation than my poor attempt above with a bit of history.

Read that and see if you still think it is OK in principle Gregory. How can a rigged game like this be OK in any way? It seems to encapsulate all that is wrong in the financial industry today.

“algo and HFT need to be considered seperately regardless of what wikipedia informs the masses”

Not too sure about that. Maybe it is some financial convention to separate the two – but all virtually all, if not all, computerized programs in any application are based on an algorithm of some type, so to apply the term algorithmic trading to HFT would seem quite appropriate in my opinion.

At the end of Ellem Browns article there is this conclusion – implying that any tobin tax would need to be in the region of 1% to be effective:

BTW “the term “flash trades” is described and explained earlier in the article and is apparently a key to the success of the “front running” operation.

“Reviving the Free Market

So what can be done to restore free and fair markets? A step in the right direction would be to prohibit flash trades. The SEC is proposing such rules, but they haven’t been effected yet.

Another proposed check on HFT is a Tobin tax – a very small tax on every financial trade. Proposals for the tax range from .005% to 1%, so small that it would hardly be felt by legitimate “buy and hold” investors, but high enough to kill HFT, which skims a very tiny profit from a huge number of trades.

That could work, but it might take a tax larger than .005% or even .1%. Consider Denninger’s example, in which the high-frequency trader was making not just a few pennies but a full 29 cents per trade and had an opportunity to make this sum on 99,500 shares (100,000 shares less 5 100-lot trades at lesser sums). That’s a $28,855 profit on a $2.63 million trade, not bad for a few milliseconds of work. Imposing a .1% Tobin tax on the $2.63 million would reduce the profit to $26,225, but that’s still a nice return for a trade that takes less time than blinking. A full 1%, on the other hand, would pretty well wipe out the profit and kill the trade.

Better yet, however, would be to fix the problem at its source — the price-setting mechanism itself. Keiser says this could be done by banning HFT and installing his VST computer program in its original design in all the exchanges. The true market price would then be established automatically, foreclosing both human and electronic manipulation. He notes that the shareholders of his former firm have a good claim for voiding out the sale to Cantor Fitzgerald and retrieving the program, since the deal was never consummated and the investors in HSX Holdings have never received a penny for the sale.

There is just one problem with their legal claim: the paperwork proving it was shipped to Cantor Fitzgerald’s offices in the World Trade Center several months before September 2001. Like free market capitalism itself, it seems, the evidence has gone up in smoke.”

HFT is as systematically important as a young Michael O’Leary selling batteries for double normal price on Christmas Day was. It’s interesting, potentially reprehensible, and adds no economic value. But it doesn’t mean spit, systematically.

As I’ve posted earlier in the thread, the FTT as proposed is dangerously mis-designed. A “sliver” tax on financial firms’ turnover – small enough not to have a major impact on liquidity, but of a size that would raise meaningful revenues, would be welcome, at least in theory. I would no more object to one than I would to world peace.

Unfortunately the “tax the banks” cohort seem to bypass the all-important fact that, not only is the European banking system close to insolvent, but sovereigns – either directly or via the ECB – have been put on the hook for both existing and future losses in the banking sector through the “no bank left behind” policies pursued over the last 4 years. A tax on banks, while this (unstated but very existent) policy remains in place is, in fact, a tax on sovereigns and their taxpayers and creditors.

I wish more comment had been made in this thread on the factual proposals for the FTT, rather than the hairsplitting HFT posts that appear to have dominated the thread. There is a much bigger picture, and sight has been lost of it, to my mind.

@ aiman

+ 1

There are more red herrings being pursued on this thread that one could find in the North Sea.

The Commission proposal, if my memory serves me right, even refers to the financial sector contributing its “fair share”, a concept entirely overtaken by the events of the past four years.

There seems to be a lot of cross purposes and misunderstandings on this thread. Earlier you posted:
“The FTT as proposed is bonkers, in terms of scope of applicability, and of rates.”
I must confess I have been assuming that any FTT would have been mainly targeted at the HFT market manipulations, but you seem to think that normal commercial banks are also targeted Have you a link to the proposal – I don’t think Gregory posted one. As you say its effectiveness or desirability all depends on the design.

@ Amac

I think we’re getting too caught up with the terminology and missing the context. My point is simply this – there very distinct types of algo trading. One is pure HFT which is simply nipping in and put (front running or not) and does nor in any way shape or form want or use volatility. The other would be much more “black box” algo which looks for very specific signals or movements in the markets and may not actually trade all that often (relative to market size and depth), but which could end up with very specific trades as opposed to pure HFT, and which may or may not want large volatility (it may be lookin for moderate short term intraday volatility). There is then algo program’s who are simply used by the likes of the mutual fund involved in the flash crash which are simply meant to be the most efficient way of execute large orders over a few hours. You can’t call them all HFT cos they’re not all high freq, and if you call them all algo, then it becomes a meaningless term. So simply you have to explain the difference, and understand the difference, rather than simply know how to copy and paste of wiki like some people.

Re who it’s targeted at – I assumed all transactions, not just ‘manipulation’ HFT. Maybe I misread too.

@ All

All you ever wanted to know about the FTT (and the FAT) and were afraid to ask!

This has to be the daftest exercise on which the EU has ever embarked againts the background of most trade in financial services being exempted from VAT.

The macro-economic impact is of particular interest.

“The model used to analyse the macroeconomic impacts suggests that at 0.1%, a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%”.

That is exactly what we need right now!

By the way, the figure for HFT in the impact statement is 40% not the 70% quoted in the original contribution (as per Wikipedia?).

@Bond, Eoin Bond
Ok I see what you are getting at and I think I can agree that they are separate – algos being designed on some kind of mathematical model which claims to be able to predict trends – like that model those guys were awrded a “Nobel” prize for just before it’s use almost collapsed the World economy in the 90s (LTCM)
Just before I read your post I was reading this old NYT article!

The author describes HFT in a way which makes it clear he is talking about “trend” detecting algorithms, or at least confusing the two. I am sure though that at this stage there are added complexities so it is very likly that they are combined in more than just the minds of the confused!

I suspect what will kill the use of HFT in the end ,if as I suspect FTT will not then it will be when lack of trust in the markets becomes widespread.

@DOCM – yes 40% sounds correct for the EU which is the appropriate region for the analysis in that paper – it is higher (70%) in the US and much lower in Asian markets.

@ All

As a postscript, it seems clear at this stage from French press coverage that what Sarkozy is attempting is a pre-electoral coup consisting of legislation (by way of amendment to the finance bill) in early February to introduce (i) a so-called “social VAT” i.e. an increase (2%?) which would be used to offset the excessively high level of social contributions for French employers and, by way of a politically compensating measure, (ii) an FTT.

These manoeuvres smack increasingly of desperation. However, Sarkozy is a canny political operator and he has already wrong-footed the Socialists on the issue of the debt brake (blocked in the Senate by them). Hollande also faces the problem that he cannot write any form of detailed election manifesto because of the disagreements in his own camp.

To be continued….

@ All

Hollande has now stated that, if Sarkozy introduces the “social VAT”, he, if elected, will repeal it.

15 all!

If the argument for a Tobin Tax is that “excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability” then I’d like to see evidence that the current crisis was caused by something other than long term sustained mispricing of risk and plain old bad lending….or that it’s being sustained by anything remotely related to “excessively-large trading volumes and hyper-fast price changes”.

This crisis has little or nothing to do with market volatility.

Next, the justification for a tax ignores not only the fact that it would drive trading to untaxed markets, but also that it would quite probably reduce market efficiency and increase volatility since it would increase the size of trades.

Finally, the chance that either the UK or the US are going to sign up for this tax has to be nearly zero, making it a simply bad idea for Ireland to sign up.

@Hugh Sheehy
“If the argument for a Tobin Tax is that “excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability” then I’d like to see evidence that the current crisis was caused by something other than long term sustained mispricing of risk and plain old bad lending….or that it’s being sustained by anything remotely related to “excessively-large trading volumes and hyper-fast price changes”.

For the rationale for the taxes it is worth reading the Impact ssessment document linked by DOCM just above – volatility is a minor aspect of it but reduction of HFT is a priority – but not because of market volatility – but perhaps for the reasons I have argued above although it is rather coy on that.

Also (from the IA):

“The crisis resulted from the complex interaction of market failures, global financial and monetary imbalances, inappropriate regulation, weak supervision and poor macro-prudential oversight. It has been argued that taxes could be used as regulatory tools to address the problems such as implicit or explicit guarantees; automated trading (and more generally shortterm rent-seeking); different tax treatment of debt and equity; excessive remuneration schemes that encourage risk-taking; large amounts of complex derivatives, and the existence of economic rents, leading principally to wage premiums in the sector.”

The IA doesn’t ignore the “relocation” element read Ch 7.8 but it is a bit watery on it.

I don’t get your point that it would increase market volatility. The small trades used by HFT are really nothing to do with trading just a means of “looking at your opponents hand” and really just an element of a front runnin fraud which it seems is only being gradually cottoned on to.

@amac – DOCM has posted a link to an EU assessment paper, but the proposal itself being assessed is at the following link

Take a look at the definitions both of a financial institution and of a taxable transaction (Article 2, p.16). This is not, as its proponents may hope, a surgical strike aimed at HFT, this is a dirty bomb aimed at the the financial infrastructure of the eurozone. I hold no brief for any bank or banks, but I do hold out hopes the we can retain in Europe a banking system (preferably one where the risk capital employed is exactly that, and not a liability of the host sovereign). The FTT as proposed has the capacity, at a stroke, to do more damage across Europe than all the Depfas, Dexias, Anglos, Lehmans and others have managed in the last four years.

Cameron has certainly nailed his colours to the mast on this subject this morning. Veto, over my dead body, etc. He’s told France to implement it on their own so no doubt we will see another Anglo-French spat this week.

@PR Guy
Is there something new here? Last month he was vetoing a different pact or accord to stop a FTT. If he could just veto the FTT why then last months veto?
I searched for this “story” but only the IT – not even the BBC – has seen it worthy of a mention. Where did you read it?
The main headlines in the British media is about the 49% increase top executives have decided to award themselves last year. It is a point I have made here before – it is not just bankers who have their snouts in the trough. It seems that shareholder owned companies in general are being robbed in a massive scale by their executives.
I suspect though that Cameron is just making crowd pleasing noises in that regard and he will never do anything about it.

@ All

The French financial industry has now reacted with an appropriate level of alarm. It is unlikely to stop Sarkozy. The latest Ifop opinion poll puts him only 2 points behind Hollande in the first round (April); 26 to 28.

Merkel is in a very invidious position as her own finance minister is as block-headed on this issue as Sarkozy (and he does not have the excuse that he is seeking re-election).


He was live on the Andrew Marr show today. Last months veto was the fiscal compact (which is not about a FTT), this months is the FTT. Next month……
This was in addition to talking about the 49% you mention.

@PR guy
The reports at the time was that Cameron held out against the fiscal pact – which after all only applied to the EZ in order to get cocessions on the proposed Financial Services regulation – which is a lot about FTT. This is how thr Guardian reported it:

“Cameron wielded the British veto in the early hours of the morning after France succeeded in blocking a series of safeguards demanded by Britain to protect the City of London. Cameron had demanded that:

• Any transfer of power from a national regulator to an EU regulator on financial services would be subject to a veto.

• Banks should face a higher capital requirement.

• The European Banking Authority should remain in London. There were suggestions that it might be consolidated in the European Security and Markets Authority in Paris.

• The European Central Bank be rebuffed in its attempts to rule that euro-denominated transactions take place within the eurozone.

Sarkozy, who had faced criticisms on Thursday evening that he was isolated after claiming that Britain was pushing for a complete opt-out from financial regulations, rejected the demands out of hand.”


“The small trades used by HFT are really nothing to do with trading just a means of “looking at your opponents hand” and really just an element of a front runnin fraud which it seems is only being gradually cottoned on to.”

Higher trading volumes actually benefit market participants in the form of narrower spreads. That is why EUR/USD spreads are typically better than other pairs with lower volumes.

Banning HFT (or making it unprofitable through taxation) will reduce traded volumes significantly and lead to higher transaction costs for all.

These “small trades used by HFT” may seem insignificant but they are offering liquidity to those who want to take the opposite side of the transaction.

The high liquidity created by HFT is a good thing and mustn’t be ignored. The EUR/USD pair is a lot less volatile than others such as GBP/JPY because it is traded more (algos included). When liquidity dries up, there are fewer willing participants to take the other side of your order and consequently price can move much further away from your ideal price in search of a complete fill for your large order = higher volatility. That is the way markets work.

Removing HFT will lead to higher volatility and higher transaction costs. The whole thing is a dangerous and ill-informed gamble made by politicians who know nothing of the workings of the financial markets, backed by an equally misinformed public that is baying for bankers blood.

What the public doesn’t realise is that THEY are the ones who will ultimately pay for this through failing pensions, endowments and savings schemes – they all need to buy and sell financial products and will incur higher transaction costs as a result of the tax.

Then there is the fact that the banks now make a huge portion of their profits through HFT and the UK government relies on the large taxes they pay.

The whole thing is wrong and should be buried.

BTW: I’m not a banker but I do invest in stocks and FX as a retailer and would not appreciate higher transaction costs.

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