Revisiting the Transaction Tax
The other side of the discussion emerges.
We strive to see both sides in the 'Ville and believe, as a matter of course, that the friction between opinions is where true education is found.
Over the last few days, I've weighed in on the proposed transaction tax overseas, which has suddenly morphed into a hot-button topic for free-market enthusiasts around the world. Out of respect for your time, I'll revisit my opinions here:
- Taking Stock with Pimm Fox: Bloomberg Television, August 10, 2011
- What the Proposed Transaction Tax Means for the Market: Minyanville, August 16, 2011
- Random Thoughts: The Transaction Tax and Big Cap Tech: Minyanville, August 17, 2011
This stream of consciousness triggered a healthy exchange of emails with numerous market participants, some of whom made the case that High Frequency Trading (HFT) -- which is what the transaction tax would impact most -- isn't the cause of the out-sized volatility but rather a convenient culprit in a finger-wagging world.
Intrigued, I delved a bit deeper. If there's anything I know for sure it's that in certain regards, I know very little.
A persistent point about HFT that is largely misunderstood and lost in translation, according to one of my sources, is that spreads (between the bid and ask) are now lower than they've ever been and as a result, transaction costs have never been more customer friendly.
"The market has always been a mix of investors with different time horizons -- from years (mutual funds) to months (hedge funds) to days (risk arbitrage) to market makers, flippers, and day traders (minutes)," says another trusted source, "It's just happening faster now. In fact, most mutual and hedge funds are themselves employing HFT strategies as they implement their investment decisions."
I agree with these points but offered an analogy to demonstrate my concern. "I look at it as the blood alcohol content of HFT vs. average daily volume," I said. "There is a healthy level of computer driven programs where the market can "legally" drive without being dangerous to others. It seems to me, and this is one man's opinion, that the alcohol level and the blood level have switched ratios."
(See also: Thoughts on High-Frequency Trading, Investor Psychology, and Market Volatility)
I am in violent agreement with those who believe that folks are looking to place blame and point fingers -- that's endemic of the broader social mood shift -- and indeed, few would care if The Flash Crash or Slow-Motion Slash (this summer) worked to the upside (or put another way, they didn't care when it did.)
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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