High-frequency trading, or HFT, is suddenly the focus of investigations by the New York State Attorney General’s office, the FBI, the Commodity Futures Trading Commission and the Securities and Exchange Commission. It’s also the subject of a best-selling book, Michael Lewis’s “The Flash Boys,” which has catapulted the issue onto 60 Minutes and The Daily Show, among other prominent media places.
High-frequency traders use privileged computer placement to gain access to exchange data milliseconds ahead of the pack; then they insert themselves between buyers and sellers in order to turn tiny price differences into high-volume profits.
Since the Flash Crash of May 2010, there has been much talk about HFT’s potential to destabilize the securities markets. The world has been slower to wake up to the more basic point that, even in the stablest of times, high-frequency trading is electronic highway robbery – a raid on the pocketbooks of investors and the credibility of financial markets.
Now, at last, the immoral and predatory nature of this activity is beginning to attract the notice of lawmakers as well as regulators, journalists, and talk-show hosts. Here’s something – one thing – Washington could do about it: enact a Wall Street speculation tax.
Because of the tremendous volume on which algorithmic traders depend, a very small tax on individual transactions – too small to make a noticeable difference to ordinary investors – would be enough to make high-frequency trading unprofitable. In addition, a speculation tax, or financial transaction tax, would raise significant revenue – hundreds of billions of dollars over 10 years, according to the Congressional Budget Office. It would collect that money from other high-volume Wall Street players, even as it incentivized them to slow down a bit, thus nudging the financial markets away from churning and short term gamesmanship toward more useful private and public investment.
That combination of benefits explains why a wide range of economists and other experts – including many notable figures from inside the financial industry itself – have come out in favor of the idea.
Eleven EU nations are moving towards the enactment of such a tax. In our country, speculation-tax bills have been introduced in both chambers of the 113th Congress. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio have joined forces to propose a .03 percent tax (that’s just 30 cents per $1000). Minnesota Representative Keith Ellison has introduced a bill calling for a significantly higher, but still modest, tax of 0.5 percent. Their efforts deserve wide and serious support.