Gently easing my way back into the daily grind after my annual vacation I came across the report that MPs in London are proposing to tax HFT. They must have been drinking more sangria than I have over the past few weeks. For a start, any tax aimed at changing behaviour needs to be very clear about what behaviour it is targeting and the preferred outcome it is trying to achieve. As everyone knows, HFT has no formal definition. The politicians say they want to prevent investors taking very short-term positions – but what about day traders, what about electronic market makers that basically provide the oil that lubricates nearly every market worldwide? Second, there is no definitive proof that HFT is actually harmful to markets. Yet again I fear this is politicians trying to leap on the populist bandwagon of “doing something” about the finance industry. Yes, some people break the rules (as they do in every walk of life) and when they get caught they are punished. Finally, and perhaps incidentally, it won’t work. Are they proposing to tax firms trading in the UK, those trading in UK stocks from abroad, those trading the derivatives of those instruments? The challenges of extraterritoriality will ensure that the market will find a way to dodge any such legislation.
As the renowned theoretical physicist Wolfgang Pauli said when shown a piece of sloppy analysis: “Not only is it not right, it’s not even wrong!”