As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Friday, July 31, 2009

One Ha'penny, Please

Since the New York Times' story dropped last week about high-frequency trading, lots of people have been trying to wrap their heads around it. To me it just sounds like straight-up theft. Information is currency in the market, and Goldman Sachs and the other high-frequency traders are simply buying information low and cashing in high. It's a money machine, as K-Drum notes.

Fortunately, there's a simple and elegant fix that would allow Goldman or whoever to keep with their HFT while improving the federal budget situation and maybe, just maybe, voluntarily curbing the practice. Just tax individual financial transactions.

Dean Baker is probably the most aggressive advocate of this approach. But Larry Summers has promoted it in the past. And Britain actually has a version of it on the books. At base, it's simply a microtax on financial transactions. Say, one-half of one percent on stock transactions. The average investor would hardly notice it. Most investors would hardly notice it. But high-volume traders would notice it quite a bit. Baker estimates that the tax could raise more than $100 billion annually, even taking into account the resulting drop-off in high-volume trading. That's money the federal treasury desperately needs.

And it's money that's coming from something that the financial sector does not particularly need. I've not heard many analysts say that the problem with the financial market is that it's just too slow. Rather the opposite, in fact. If high-frequency trading is really worth something to these firms, they can pay the transactions tax, and the rest of us can have the guarantee that this financial innovation is actually helping the country. If it's not even worth a half of one percent, it's probably not something the market -- or the rest of us -- need all that much.

'Xactly. Free market in action and all that. We can try to site mainframe computers and come up with all sorts of regulatory hoops that HFTs can jump through (and over), or we can take half a penny on every trade. If the stock market is oh-so-valuable and important to our economic future, then they can gladly afford half a penny.

I even like this better than restricting CEO compensation, because the latter smacks of intervention in the marketplace and can also be easily subverted, while a simple tax on transactions, which are widely available as data, just cannot. To put this in context, a half-penny on every trade would, over the course of ten years, pay for the entire health care bill. If giant investment firms are going to gamble with our money, they can at least ensure that some of it returns to the taxpayer.

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