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Not even wrong

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!”

5 Responses to “Not even wrong”
  1. Chris Tubby says:

    I believe the driving force is actually the EU (as always) rather than our MPs. The real HFTs send a massive amount of orders per day but only execute a small percentage. As HFTs are the most technologically advanced in trading they pick off slower systems and resting orders when underlying fundamentals change even slightly. As a seasoned professional trader I welcome HFTs having their wings clipped.

  2. Fatdaz says:

    I beg to differ about impact of HFT on markets and anyone who follows the research of Nanex in the USA will be in little doubt about the nature of HFT. However MP’s are once again meddling with things they do not understand here. Markets will resolve the HFT issue themselves or rather market forces will as their usefulness or lack of it comes more into focus and other sources of income mean that banks and brokers find other sources of commission.

  3. steve grob says:

    Yep I agree that the noise created by some HFT activities can be a problem. Markets however have always be been based on some firms investing so that they have an advantage over others. The first example I can think of were the Rothchilds that used carrier pigeons so that they could get advance notice of the outcome of the battle of Waterloo. They made an absolute killing on the London markets.

  4. ftf says:

    They are selling it as a tax on HFT, or banks, or financial sector when they are really taxing shares and bonds, those little important things that individuals and pensions invest in. HFT, or banks, or financial sector will not be paying this tax.

  5. Dean says:

    As a seasoned professional trader I welcome HFTs having their wings clipped. You would be out of business within a month under a FTT, hefty price to pay to see their wings clipped.

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