[guimarin]

Five points for the OWS guys.

1. Transparency. We need to see where every dollar of the US federal gov't is spent. It needs to be on the internet, and it needs to be easily accessable. An exception can be made for classified spending in specific, but not so categorically (IE we spend X on classified stuff). Additionally, just like there is a Surgeon's General Warning on cigarette packages, there needs to be a link on every candidates webpage that lists their top 100 donors, and what industry they are in. This website URL needs to be easily visible and placed in every television and radio advert as well.

2. Investment banks cannot also be commercial (depository banks). Investment banks become partnerships where c-level owners are financially responsible for the actions of their banks. The banking system survived before things changed from this, and it will survive afterward.

3. There should be a small federal tax on the sale of any type of derivative, bond, stock, or other financial instrument every time it is sold. Say $.10 per share, every time. The financial markets are for raising capitol for companies, not for financial hackers to make money. HFT is a waste of time and energy, adds unnecessary volatility, and has yet to be shown to be anything more than tangentially related to the goals of a financial security market, established for the purpose of raising capitol.

4. The tax code needs to be simplified. There are a number of ways to do this, but the end goal should be to end loopholes that allow companies like exxon to pay no federal taxes. Or any company for that matter to realize losses in the US and gains in a foreign country.

5. Finally, there should be a 4 term limit on US Senators, and an 8 Term limit on US Representatives. Self-explanatory.

[othermaciej]

A financial transaction tax is not that great in the first place, but making it $.10 per share instead of a percentage of the price paid is a bad idea. Let's do some math:

  Activision-Blizzard Share Price (ATVI): 13.50
  Tax on a $100,000 trade: ~$7407.40
  Google share price (GOOG): $586.31
  Tax on a $100,000 trade: ~$170.55
  Berkshire Hathaway Class A share price (BRK.A): 117,100.000
  Tax on a $100,000 trade: ~$.10

Creating this massive disparity in the tax payable based on share price would cause massive market distortions in the short term. It would also lead institutional investors to pressure corporations to do massive reverse splits to drive up the per-unit share price to minimize the tax per transaction, which would lock small-scale retail investors out of the market in addition to being a huge waste of resources.

This idea is clearly half-baked. I think a number of your other ideas are as well. You need to think through what actual benefits you expect from your proposed changes, as well as what the unintended consequences would be. Your post does not explain this very well at all.

To cite another example: forcing a split between retail and investment banking is a common talking point from people who want "more regulation". But most folks advocating for this do not have a coherent explanation for why this would actually be helpful. It's often claimed that deregulation contributed to the crisis, therefore we need to bring back this regulation. But the institutions that precipitated the crisis were all pure investment banks, so this regulation would have done absolutely nothing to prevent the financial crisis. This post does a great job of explaining why this particular policy proposal is poorly thought out, as well as covering the general issue of advocating policies without actually understanding what they would do or why they might be worthwhile: <http://www.theatlantic.com/business/archive/2011/10/if-you-f....

[guelo]

On the Glass-Steagal reinstatement, even though you did not offer any argument against it except to repeat McCardle's claim that people don't know what they're talking about, I'll offer an argument for it even though I admit I'm not some financial expert.

Glass-Steagall meant that investment banks had to entice investors to put their money into the system. The repeal allowed investment banks to raid and leverage depositors accounts. This introduces systemic risk because depositors unlike investors view their savings as a demand account and receive little interest because of that. Their money is basically cheap for the banks to get and the depositors always expect that money to be there. Investors expect a return that justifies the risk that they are entering into together with the investment bank/brokerage. Their money is relatively expensive to banks to get because the investor knows that money could disappear. Once banks could treat all those deposits as levergable funds for risky investments they didn't have to entice the expensive investment money or use caution in their investments (FDIC will pick up the losses). So with the repeal of G-S, brokerages suddenly had access to huge piles of FDIC insured money and all that money needed some place to go... and we've coincidentally had 2 major bubbles since. First the dotcoms, then mbs's and other related cdo's and now Treasuries. Break up the banks, make the investment houses have to make sensible bets (not 50:1 levers) that return better returns for investors and force banks to make terribly boring investments to return terribly boring rates to depositors and we have the beginnings of the return of sanity in banking. Without that, we will continue to inflate bubbles, pay bonuses and then bailout losses after the unavoidable asset deflation.

Here is another, more informed than me, argument for reinstatement http://moneywatch.bnet.com/economic-news/blog/maximum-utilit... "However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it’s clear that it has made the system more vulnerable for the reasons outlined above.

[yummyfajitas]

and we've coincidentally had 2 major bubbles since. First the dotcoms...

Dotcom bubble: 1995-2000.

Gramm-Leach-Bliley: Nov 1999.

Further, if you measure the housing bubble in the usual way (movement in the price/rent ratio), the housing bubble also started in 1998.

http://research.stlouisfed.org/fred2/graph/?g=31w

[rskar]

http://en.wikipedia.org/wiki/Timeline_of_the_United_States_h... indicates United States housing bubble was from 2001-2005. However, it also says that in 1998 the nflation-adjusted home price appreciation exceeded 10%/year in most West Coast metropolitan areas.

[othermaciej]

Thanks for presenting an actual argument. However, I am not persuaded by your argument. First, there is the timing issue noted by the commenter below. Second, in general, speculative bubbles are not driven by retail savings, or the idea that they are some how extra easy money. Speculative bubbles tend to be driven by (a) sustained periods of market irrationality; and (b) low interest rates. Interest rates are driven primarily by the Federal Reserve, not by retail depositors. The housing bubble in particular was inflated in large part by overly liberal granting of unaffordable mortgages on the expectation that housing prices would continue to grow. Issuing mortgages is a classic commercial bank activity, not an investment activity. The contagion to the wider financial system was through repackaging of mortgages into derivatives, something that was largely done by entities with no commercial banking activity, such as Lehman Brothers, Goldman-Sachs, Fannie Mae, and Freddie Mac. Combining commercial and investment banking under one roof was not particularly involved as a driver of the crisis.

I am also not persuaded by your linked argument as an argument for Glass-Steagall. It argue for the Volcker rule, which is not the same thing as any former provision of Glass-Steagall. I am not sure why the author relates the two, other than perhaps the fact that Glass-Steagall is a popular talking point. To be more clear on the difference, the provision of Glass-Steagall that tends to capture the popular imagination, and which was repealed in 1999, was a rule against combining investment banking and commercial banking within the same entity. The Volcker Rule would instead forbid banks from trading for their own account, while still allowing them to combine commercial and investment activity. I don't have enough knowledge of the Volker rule to argue for or against it, but I the sketchy argument made in its favor and the attempt to conflate it with Glass-Steagall are not terribly persuasive.

Finally I don't think there is any onus on me to offer an argument against Glass-Steagall, until someone presents an argument in its favor. Surely the burden of proof should be on those favoring a new regulation. That being said, the major reason the rule was repealed is that it made US banks uncompetitive compared to foreign banks, with no clear sign that the US banking system was more stable than foreign banking systems as a result. There is no particular reason to think this has changed. So reinstating the rule would make US banks less competitive and perhaps drive more financial activities overseas, for no clear gains.

[jholman]

Excellent link.

Regarding splitting retail/investment banking, the following is a completely ignorant question, phrased in the form of a rambling incoherent hypothesis. I don't understand why it was a good idea for the U.S. to bail out the banks, but I can see how retail banking is essential to the month-to-month life of Main St, and so I can see why the government might be willing to spend taxpayer money to save it (to save taxpayers). It seems like maybe if retail banks weren't all playing the investment-bank game, maybe the suicidal investment banks could have been allowed to fail?

[othermaciej]

I personally would have preferred to see banks allowed to fail, and get wound down by the FDIC, to bailouts.

I think the reason for the bailouts was not combination retail/investment banks. The biggest recipients of bailouts were pure play investment banks. The theory is that failing to bail them out would have led to contagion across wide swaths of the financial system, but the main vector would not have been retail banks; it would have been the counter-parties to the many transactions that the investment banks had, including such examples as pension funds holding CDOs.

I think the root cause of the bailout was the revolving door among the biggest investment bank players (especially Goldman Sachs) and financial regulators, including the Fed, the SEC and the Treasury Department. It's a classic case of regulatory capture <http://en.wikipedia.org/wiki/Regulatory_capture>. I don't think this is so much outright corruption, as the fact that the top finance people in government have gradually come to have the same worldview as the top finance people on Wall Street. So it was easy for them to think that a rash of bank failures was the worst possible thing imaginable, and must be avoided at any cost. At the same time, they could not imagine imposing severe consequences on the management and investors of those banks.

If there's any regulation that is truly critical, it's preventing this revolving door. But I am not sure how we can sanely do that.

[mynameishere]

end loopholes that allow companies like exxon to pay no federal taxes

Corporate taxes are idiotic. They should tax them at zero and replace the lost revenue with a new upper-margin tax. Reasons:

1. Corporate taxes are effectively a sales tax.

2. Corporations, unlike individuals, can hire armies of lawyers, accountants, and lobbyists to get around the taxes.

3. Those same professionals are more often deployed by large, rather than small, companies.

4. Those same professionals are intelligent people wasting their intelligence on tax avoidance. They could just as easily be useful to society. Engineers, doctors, teachers, etc.

[cperciva]

Eliminating corporate taxes isn't exactly what you want: It would turn corporations into tax shelters, allowing investments to compound at a faster rate. (You'd be effectively giving everybody an unlimited Roth IRA.)

What you really want is an integrated tax system like Canada and many other countries have: Corporations pay income taxes, but when they pay out their profits as dividends, the individuals receiving those dividends pay tax on their share of the corporation's pre-tax income, but get a tax credit equal to the amount of taxes the corporation paid. (Sounds complicated? It is -- but it works.)

As a side benefit, this fixes the "Buffett pays less tax" problem, since the taxes paid on corporate taxes (in the end, once they've been paid out as dividends) are based on the same progressive system of increasing marginal rates as any other income.

[3pt14159]

It is better in Canada, but we have loop holes like the rest of them. Certain countries have tax treaties with Canada that effectively allow a massive decrease in dividend taxes provided that you have "management fees" in those countries. Although you wouldn't qualify for other benefits of being a Canadian company, such as the one time 750k tax free capital gains allowance, or SR&ED or research grants.

[cperciva]

Oh, I'm not saying that the Canadian tax system is perfect. Far from it. Just that this specific property -- integration of corporate and personal income taxes -- is a very good thing.

[3pt14159]

Definitely, in this we are in agreement.

[hugh3]

It would turn corporations into tax shelters, allowing investments to compound at a faster rate

Is that so bad? Is it bad if we encourage people to invest in businesses rather than term deposits (or CDs as I think they're called in the US)?

[cperciva]

That depends on what the businesses are doing. If people set up corporations which do nothing other than hold term deposits, I don't see how that's any better than people directly holding term deposits.

[anigbrowl]

Your first point contradicts your second one. If they could be passed onto customers so easily, corporations wouldn't spend money on avoiding them, the cost of which also has to be passed onto customers. In reality, the fraction of corporate taxes passed on to the customer is inversely proportional to the elasticity of demand for the good.

[majika]

You make a good case.

However, I think it's important to acknowledge that corporate taxes are useful for providing an incentive for corporations to do something a certain way. That is, they can avoid the tax if they change their behaviour. (see: equal-opportunities employment, regional commercialisation incentives, emissions control, recycling, etc)

[njharman]

Greed is the most powerful force in the world. If you tie regulation to money, it will be exploited and corrupted. It also shifts accountability from the individual violators to "the corporation". Instead enforce criminal laws against people. Doing the "right thing" doesn't deserve reward. Doing the "wrong thing" does deserve punishment.

[majika]

You want to criminalise failure to recycle, or failure to provide a work environment that's unreceptive to disabled persons? How's that going to work?

At what point does pollution or energy usage become criminal?

[njharman]

> At what point does pollution or energy usage become criminal?

At the point it harms society as a whole.

[Jach]

"There is no heaven, but if you do bad you are going to hell."

[SkyMarshal]

Corporate taxes also incentivize corporations to outsource or relocate operations overseas, and disincentivize them from repatriating profits made overseas.

I would be willing to consider giving up the ability of the government to micromanage corporate behavior in return for recapitalization of the US manufacturing base and repatriation of profits.

[harryh]

Dear god yes. The army of people out there that seem to think that more corporate taxes will somehow mean that people won't have to pay taxes amazes me.

Like Romney said “Corporations are people, my friend."

[artsrc]

Corporations are not 100% owned by American people. And they are certainly not mostly owned by the bottom quintile.

[guimarin]

You cannot replace a corporate tax with a personal tax, all persons will simply become corporations.

[harryh]

There are already laws against that that are very strictly enforced. Try incorporating yourself and deducting the cost of your mortgage or car payment and see how long it will take for you to end up in tax court.

[gujk]

You gave two working-class examples. When the corporation is a REIT with milions of dollars in invested assets, or an independent contractor consulting firm, that is a different story.

[guimarin]

When people bring up this argument, I feel like I'm screaming in a room full of people and everyone is ignoring me.

You cannot make it easy for people and corporations to be interchangeable and then have differing tax rates for each. They MUST have the SAME rate.

eg. I 'own' all my rental properties through LLCs which are themselves 'owned' by a corporation of which I am the sole benefactor. Travel? expensed. Living in my house for free? No problem, house owned by LLC, rent waived by my own corporation. Any living expense whatsoever? No problem, benefits of running/owning the corporation. What then is the point of being an individual on your tax return? Oh yes, I pay my fair share on my income of $1 per year.

Honestly, sometimes I think people like you who bring up these arguments are completely uneducated.

[harryh]

If you are actually doing what you describe then you are breaking the law and will eventually be caught and hit with a gigantic bill for back taxes plus a hefty fine.

[kb101]

Not at all. Setting up trusts like this is what family offices do for wealthy people. The goal is to legally structure everything so that the total tax bill is minimized. High net worth individuals never just have a big fat bank account and a stock portfolio, there is always an array of trusts typically set up as LLC's to minimize tax exposure. It's unfortunate that he's being downvoted into invisibility (presumably due to the irritated tone of his post) but the fact is that he is correct in his assertion.

[mdda]

Your living expenses and rent are a benefit you receive as an individual from the company, with a direct monetary equivalent : You should be declaring it, and paying tax on it.

[brc]

You're right, of course.

The top marginal tax rate and corporate tax rate should be equalised.

That way there is no tax benefit to putting revenue through corporations or individually.

Yes, the tax offices can catch abuses like this, but it would be much simpler if there was no tax advantage to doing it one way or the other.

The amount of tax accountants and lawyers that do no productive work because they are moving stuff around in entities makes me want to cry. It's a giant churning game that does nobody any good. The govt doesn't get the money, because they can always be outsmarted. The armies of people doing the outsmarting don't contribute to society.

Just equalise the top tax rates for individual and corporations and loopholes disappear by the bucket load.

[cperciva]

I can't speak to the US tax system, but people absolutely don't get away with doing that in Canada. People try it, of course; but the Canada Revenue Agency is very good at catching "benefit conferred on a shareholder" and taxing them as deemed dividends.

And, of course, throwing people in jail who deliberately fail to report such benefits.

[guimarin]

thus the army of lawyers, accountants and golden shares. It's good to live in a globalized world.

[noahc]

It seems plausible to make it so that people can't become corporations.

1. The IRS already does this with certain classes of businesses in which they make it illegal to form them purely for tax avoidance purposes.

2.You set the corporate income tax to 0, but personal income tax to whatever. You then make all corporate profits flow through to individuals, and make corporate write offs and deductions rare/impossible/non-existant.

Under our current tax environment, you're right. But there is nothing inherent in reality that makes this impossible.

[mchusma]

First, You can read this graph in many ways, including that everyone has become more wealthy in a short period of time.

Second, all of guilmarin's points: 1) Transparency - Only politicians would disagree with this. Good idea. 2) As other readers pointed out, this is a red herring, and would not solve anything. 3) This has the effect of killing the messenger, and there is a lot of evidence that derivatives are extremely helpful to markets as an information tool and reducing volatility. I certainly can't come up with a compelling moral reason to limit free people from doing what they want with their property. 4) The tax code should be simplified, but because simplicity is inherently better. Removing the corporate tax, as indicated, would both decrease complexity and promote investment. 5) Do you have any evidence that junior senators and representatives are better or worse? I could see a problem with lame ducks increasing their cronyism rather than decreasing it. I don't have an intrinsic opinion on this, but certainly sounds like a reasonable goal if you can come up with a clear mechanism on how this would help and particularly data to support. Looking at incumbent stuff might be a good way to do this.

[guimarin]

I disagree with your second point. I think that making banks which do more than lending money to businesses/individuals into partnerships will do a lot of good. They won't stiff the US tax-payer with the bill by saying that they are too big to fail and that they risked US tax-payer deposits, as is the case of BofA. If a partnership wants to take big risks that's their decision. I'm suggesting to remove the moral hazard, by using the threat of financial system collapse as a stick to get the US gov't to foot the risk bill. 3. I do not say kill derivatives, you read that wrong. I'm more concerned with HFT. That is trades that are decided on by computers and executed in the single digit milliseconds, contribute to the hollowing out of buildings downtown for data-centers, etc. 4. removing the corporate tax is probably too much of a shock to the system, I think aligning it with the personal tax, eliminating loopholes in both, and lowering both is a much better idea. 5. I think that about 20 years is a long enough time to build relationships and get things that you want done. I think that there is cultural and idea turnover each generation that needs to be reflected in the bodies that represent it. Cleaning out the old gives way to the new and the like. I also think that since we limit terms for Presidents that we should do the same in other places. I think that long-standing senators can be every bit as much a tyrant as a permanent president, albeit on a lesser scale.

[epscylonb]

Regarding the separation of investment banking from retail banking, I am strongly in favour of this.

However at the moment, investment banking subsidises retail banking quite significantly, if you change this then banks will start charging for retail accounts.

There are a couple of solutions to this, but they all basically come down to the same thing, someone has to pay for the retail banking. Either it comes directly from the customer as a periodic payment or it is funded by taxation, I suggest the later because arguably a retail bank account is a necessary part of modern life in the west and could be considered a utility.

I would personally like to see retail only banks that charge and are strongly regulated to avoid bailouts in the future.

Investment banks should be allowed to offer retail services, but they should be forced to make it clear to the customer that if their investment arm fails, there will be no bailout from the government and they could lose all their money.

Let the people who want to play roulette and let those that don't have an option too.

Sadly this kinda depends on their being enough consumers who don't want to play roulette.

[noahc]

Can anyone with more experience and knowledge explain the effects of #3. I've read that HFT is actually a good thing because it basically acts as a market maker. This is just a back of the napkin opinion, but it seems that #3 would reduce liquidity in the markets.

We know that markets aren't perfect or else Buffet and other value investors couldn't survive. Does HFT make markets more or less perfect at pricing? Does this matter for making markets more efficient in reality, not some hypothetical perfect market?

[thwest]

Market liquidity is not the same as creating value. If you aren't investing on the same timeframe that it takes to create a business (3-5 years), you are simply exchanging money for money, not creating value. There is some minimum amount of liquidity needed for things to work at all, but massive amounts of liquidity is not good in and of itself. After a point market liquidity is a force for creating bubbles, not sustainable businesses.

[jarek]

The standard response to claiming HFT as a market maker is that it provides minute amounts of additional liquidity and its costs and drawbacks, or potential costs and drawbacks, outweigh the benefits. Of course some amount of market making is necessary, but you could claim that without HFT you'd just settle your trades in 0.1 s rather than 0.02 s and with 0.5% spread rather than 0.49% spread.

I don't know enough to form a proper opinion whether or not this is the case.

Of course part of the problem is defining HFT or algorithmic trading. If you build a robot to press an appropriate button at a trading terminal really fast, is that algorithmic, HFT, and should that be banned? Do you fix the tax at 10 cents, and if so how do you react if companies just create massive securities worth millions of dollars and trade those?

[mjtokelly]

According to some recent research, HFT appears responsible for lowering spreads by more than an order of magnitude: http://marginalrevolution.com/marginalrevolution/2011/10/mor... That's a definite social good that would go away under proposal #3.

[jarek]

Right, we'd have to get some concrete numbers for the drawbacks of HFT (if any) and then compare with the benefits. What's the societal value of having a $20 spread vs a $230 spread on a million dollar transaction? What is an acceptable trade-off spread value, how do we define it in the first place?

[mikeash]

You don't need to define HFT, nor do you need to play games with values. Set the tax at a raw percentage of the transaction's value. This percentage can be ludicrously low, like one hundredth of one percent, and still achieve the desired outcome. Such a tax will have no appreciable effect on "normal" trading, but would seriously diminish HFT.

I have no idea whether this would actually be a good thing or not, though.

[jacoblyles]

I haven't seen any thoughtful reasoning behind calls for a Tobin tax. It's mostly populists who are upset that some people make money by trading.

[prostoalex]

People usually put an equality sign between high-frequency trading and algorithmic trading. One is a subset of another.

There's also a subset of algorithmic trading that inserts large stop-loss orders (not much of an algorithm there, it's just done by computer program instead of an individual), which have been known to cause flash crashes.

Hence the confusion and belief that by eliminating HFT we'll eliminate automatic stop-loss orders.

[nhaehnle]

My totally abstract reasoning is like this: For markets to function well, the barriers of entry must be as low as possible.

The possibility of HFT raises the barriers of entry. Therefore it causes at least some bad.

Personally, I think the markets should just operate at, say, 15 minute heartbeats. Anybody is open to place orders at any point in time in secret. Then, at a predetermined heartbeat time, all orders are revealed and some standard auctioning mechanism is used to match them up against each other.

Sure, spreads would be larger than they are now, but at the same time there would also be less volatility by definition. More importantly, barriers of entry would be much lower, which will cause the market to function closer to a "perfect market" over time.

[bravura]

Why does a market need millisecond-resolution liquidity?

[noahc]

I'm not sure it does need that much liquidity. But, at what point are we not liquid enough? Is hourly liquidity enough? It's a good question, but I'm not sure how you measure what 'enough' is.

[argv_empty]

At some point you'll have to decide: "enough" for whom? For someone just trying to accumulate some money for retirement, even hour-level liquidity probably looks like more than is useful (and will his broker even act on a request he makes in less than an hour? maybe someone else can answer that one).

[ArchD]

It depends on how you draw the boundaries for an 'entity'. A sufficiently large company may have many departments trading in different ways fairly independently. If you are going to tell people, "You can't sell/buy sooner than X seconds after you buy/sell.", then large organizations will have a problem being nimble being hindered by regulations about how soon you can flatten a position. Even brokers like Ameritrade and e*trade will have problems acting on behalf of their clients because different individual client will want to trade differently, if you treat them as single organizations. What about dark pools? Are you going to regulate those as well? The trading venues are about people trading stuff. It's people acting independently out of free will.

[ArchD]

Down-vote and run?

[tsunamifury]

To allow for volume.

[guimarin]

Instituting #3 will lower liquidity. I think the trade-off is worth it.

This is a topic where the critics, who argue in favor of the status quo are at an advantage, because the realities of HFT are not easily discernable to the layman, and require a much deeper understanding of the entire modern financial ecosystem. Suffice to say, there were/are pros and cons to having a specialist.

[veyron]

"Suffice to say, there were/are pros and cons to having a specialist."

Let's not go there. Specialists were accused of favoritism: filling orders that certain traders submitted and ignoring requests from other traders.

More generally, the advancements, both in technology and in pricing, actually helped everyone. SOES (small order entry system) helped smaller traders to quickly trade. Decimalization really helped reduce transactions costs (spread between bid and offer is a sort of transaction cost, when we were dealing with 1/16th quoting, the spread cost was over 6 cents)

On another front, brokers used to screw people over by telling people they bought at one price while actually buying at a lower price. This is why Regulation NMS came about. And HFTs nowadays help keep all of the exchange prices in line, minimizing the potential damage of shady broker behavior.

[guimarin]

yes and sophisticated HFT systems screw large funds from moving into and out of positions with relative ease/fairness. This cuts both ways, thus pros and cons. At least with a specialist, everyone was relatively even in that regard. Now, measuring the distance to the server in micro-seconds of fiberoptic wires, I can literally create an unfair system by owning the closest supercomputer. I disagree with your point and think that my 'compromise' tax is pretty damn fair considering. Also, I'm not arguing about the merits of digitizing the exchanges, I'm arguing that there was a cost to removing the specialists, it's obvious now, and we should fix it. The specialists were bad in some cases, enough to get people to change, but the system is just as corrupt now as it was then, just differently.

[veyron]

"yes and sophisticated HFT systems screw large funds from moving into and out of positions with relative ease/fairness." <-- that's completely false. It is precisely because of HFT systems that the capital markets were reasonably resilient, and it is because of the lack of HFT in the current environment that prices swing on the order of 5% during the day

"At least with a specialist, everyone was relatively even in that regard." <-- again, specialists were accused of playing favorites. That's manifestly unfair.

"I can literally create an unfair system by owning the closest supercomputer." <-- That's also not true. It's not good enough to have the lowest latency connection. I can have a slightly slower connection but still have an edge. To put numbers to this, lets say that I was 100 microseconds slower than the fastest person, but I could predict the next price movement 150 microseconds faster (this is due to many factors, including the particular model I use and other implementation details). Then, I would still have a 50 microsecond edge.

"my 'compromise' tax is pretty damn fair considering" <-- this would absolutely screw large funds. As was mentioned by many others, if you tax transactions, market makers will quote wider spreads (and yes, spreads are transactions costs to the large funds moving in and out of positions)

"I'm arguing that there was a cost to removing the specialists, it's obvious now, and we should fix it." <-- NYSE parity (which is a vestige of the specialists) is broken and unfair. Why should someone who sent an order after me get filled before me? Most exchanges have a price-time priority concept, so that if we are sending at the same price but I sent first, then I should get my fill first. The specialists wrecked the idea back then and the current implementation is still unfair.

"the system is just as corrupt now as it was then, just differently." <-- it's actually much less corrupt. I recommend you go and try to build your own HFT, and then you will see that the system now is much more fair than you think. (shameless plug: I started blogging about my experience: http://news.ycombinator.com/item?id=2835656 )

[yummyfajitas]

yes and sophisticated HFT systems screw large funds from moving into and out of positions with relative ease/fairness.

Fact: when you make a large trade, there is a price impact. I.e., if you sell lots of GOOG, the price goes down.

Once upon a time, large funds could use their own sophisticated algorithms to make sure their unsophisticated counterparties feel the price impact. I.e., the big fund disguises their intent, Joe IRA buys from the large fund, and then the price goes down after Joe already owns the stock.

Nowadays, HFT makes the price impact happen immediately, typically splitting the difference with Joe [1].

Why is this worse?

[1] The HFT's try to outbid the large fund in order get ahead of it, resulting in Joe getting a better price.

[brc]

I agree with most of your points except for 3. As long as the income from the transactions are conducted legally, then you'll get the tax money for them. If you try and tax each transaction, you'll just move the transactions offshore. Communications technology means that a derivative market can be conducted anywhere.

I think what you want is for derivatives to not have the chance to bring down entire sectors of the economy. That's fine, and your point in (2) would acheive this. There is also a case to be made for larger capital and margin requirements for trading firms above a certain size - ie, anyone who trades over X,000 contracts per year.

Derivatives traders can fail as much as they want as long as the failure doesn't threaten stability. It's when they bet too large, and use depositors money, that the problems start. Introducing capital and margin requirements keeps the size of the bets down and isolating trading from banking keeps them from using depositors money.

[yummyfajitas]

Regarding 3, why do you want to raise the bid/ask spread to $0.10?

Regarding 4, specifically "to realize losses in the US and gains in a foreign country", how do you propose companies avoid this situation? Should they deliberately lose money overseas as well? What would this accomplish?

[guimarin]

to answer 3. I don't want to raise the bid/ask spread. Only that there is a tally of the number of instruments you traded and the number of times. and you pay $.10 for trades*times.

to answer 4. The point of this is to stop companies from making subsidiaries in another country to realize gains, and then wait for a tax holiday for repatriation.

[yummyfajitas]

Regarding 4 (see other's reply to 3), I still don't understand why companies should be required to deliberately lose money in overseas subsidiaries.

Why not just not give out tax holidays, and allow foreign companies owned by US companies to leave profits overseas forever? Granted, this will reduce investment in the US, but we don't care about unintended consequences.

[flourpower]

3 would necessarily raise the bid/ask. If you charge everyone 10 cents to transact, then nobody will act as a market maker at a bid/ask narrower than 20 cents.

[maigret]

And that would be good in two points. People will sell less on short term, because the cost of selling will be higher. So stocks will be held longer, which will diminish volatility even more and improve the situation for small investors. What disadvantage will it have for the 99%? I see none.

[baltcode]

Increasing the bid/ask spread will increase volatility, rather than decrease it. With a low spread, if you think the prices are going to rise tomorrow, a lot of people will buy today, thus smoothing out tomorrows peak.

[rmc]

1. Transparency. We need to see where every dollar of the US federal gov't is spent. It needs to be on the internet

Every item bought, even if it costs $1.50 should be recorded? That will cause a massive increase in paperwork (how much will that cost? Will it be in paper? Or an online service that employees fill in when they buy something? What happens when their internet/computer in their office goes down? Should they not buy the thing or buy the thing and fill it in later? Do you want to turn up to your office, find no paper there and hear 'Sorry we can't go across the street to get paper cause we have to wait for the person from $FAR_AWAY to come here and fix our computer's browser?')

[epscylonb]

In the UK the government bought in a system where all purchases over £25,000 are recorded and publicly available on the internet.

I was pleased about this but I would say it is not a perfect solution, payments could be split up to go under the limit for example.

Ideally we would have a system where this is all automated, every invoice goes through a system and the results are collected. I admit this is a very tricky one though.

[russell]

3. I'm not so sure about the effectiveness of the tax on financial instruments. I think it might be more effective to require reserves to be held by the issuer, maybe a few percent They are already required in some cases. A bank is required to to hold a percentage of deposits as capital. An insurance company is required to hold reserves against losses.

At the time of the crash there was something like $60 trillion in Credit Default Swaps floating around. A 5% reserve requirement sure would have slowed that down. A reserve requirement would reduce the volatility of the commodities market, which would allow those who needed it a hedge, but reduce the incentive for speculators to churn.

[guimarin]

The point of the tax is not to regulate the derivatives market. There are valid reasons for derivatives, and arbitrarily imposing a reserve requirement on a class of instruments that is ever changing and by definition, represents different alpha and beta is a bad idea. The point of the tax is to mitigate HFT strategies. In my view they don't add anything to the system when considered from the point of view of 'why' society allows/creates such systems.

Regulating crazy financial instruments will occur when what we call 'investment banks' but you could easily extend to all cooperatives that make money on financial instruments, are required to be partnerships. It's amazing how much self-regulation occurs when an actual person is personally responsible.

[brc]

It is impossible to regulate a derivatives market. You and I can start trading derivative on anything tomorrow on the phone if we want.

If you tax transactions, the transactions will just disappear off into another location. A derivatives market with modern communications could be run out of a third world country in Africa using Warlords to protect the office. And the traders could still sit in New York offices.

If people want to do HFT, then let them, except where they might injure the general economy from large failures. If you think HFT is just for the pros, work out a way to bring it to the man in the street via a startup and make a fortune .

The only thing that should be done with derivatives is ensure that large financial institutions are not brought down by bad trading decisions (ie Lehman), and that small firms cannot seize up market liquidity through overleveraging (ie LTCM)

This can be covered off quite ably with capital and margin requirements. That's fair enough, and quite accepted throughout many other fields.

[prostoalex]

Who will pay for this new tax?

If you're a company raising money, investors will want to be compensated for this extra cost, thus shifting the burden onto the company and raising the cost of raising capital.

If you're an investor who wants to liquidate, you'll be offered a price lower than fair market value, as buyer will want you to cover the tax portion.

Armed with this knowledge, the rational you will think twice before converting cash into financial equity instruments. Maybe you'll choose CDs, maybe bonds, maybe stocks of foreign companies that trade on exchanges that have no such requirements.

You could probably mitigate the HFT strategies by suggesting the market stay open for just a few hours a week - enough for buyers and sellers to match outstanding bids, not worth it for HFTraders to bother.

[MatthewPhillips]

You say high frequency trading is bad, others say shorting is bad, and when you try to regulate what is a "valid strategy", all you are doing is injuring the entire market. I can't invest soundly when not all viewpoints are reflected in the price. I'd rather just invest privately.

[jeremyarussell]

I find myself seconding #1. I think in order for a democracy (or a republic) to work it needs to have transparency at all times. The effect that a lack of transparency has on a voters ability to pick the right candidate is too immense to continue to ignore it. Especially a candidates donors though, seeing as to how they're usually the real constituents of the elected officials.

Edit: typo

[igorlev]

3. Something similar is actually already the case in areas like Hong Kong and other commonwealth states. It's called a stamp tax (http://en.wikipedia.org/wiki/Stamp_tax#Hong_Kong) Might be an issue in the US for obvious reasons :)

[brc]

Stamp duty or taxes are a horrible idea. I live in a stamp duty regime, and if I want to sell my house and buy another one, then I have to pay about $30,000 to the government. First home buyers are exempt, but after that, you're in.

The reason it is so high is that it was set a long time ago on a sliding scale, and bracket creep of house prices means that every house traded is on the old 'high' value.

As a result, housing liquidity is low and people sit on unsuitable houses for long periods of time because they can't afford to sell and buy another. This leads to excessive commuting as people drive long distances rather than move closer to jobs, and leads to old people staying in oversized houses, tying up housing stock.

With a median priced home, if you sell it, and buy another of identical value, you will have spent nearly $50,000 on agents fees, stamp duties and other costs.

I would dearly love someone to explain to me how that is a good idea, fair or any other justification.

[wiredfool]

Sounds about like the US -- in King Co, WA anyway (a few years back), it cost about 9.1% to sell a house. There was 6% for the agents, and some handful of taxes and stuff for the other 3%. It's not that bad for the buyers though, as the seller pays most of the big stuff.

[benmmurphy]

just because the seller is writing the check doesn't mean they actually pay for it :) you could imagine a situation where taxes were dropped and instead of the sellers pocketing the extra money they are forced by competition to drop prices by the full amount of the tax saving.

[brc]

The true split of buyer/seller payment of the taxes depends on the type of market at the time. In a buyers market, the seller is going to pay all the taxes. In a sellers market, the buyer is going to pay all of them.

Either way, there is no justification for a tax on buying and selling things like houses and cars. Why you would want to disincentivise transactions between people I will never know.

[Swizec]

1. We have something similar in Slovenia - Supervizor (http://supervizor.kpk-rs.si/). It's a tool that publicly displays how much government spending and of what sort goes into different corporations.

[guimarin]

This is really cool. I have often toyed, as a hacker that is, with making a website that tracks all the campaign contributions of every local, state, and federal candidate/delegate. The information is out there. Unfortunately, I haven't had the time, or the energy to divine the correct business model for such an endeavor. (and I don't mean one that works, I mean one that works for me ;-) )

[rmrm]

2. Change that to "limit leverage, everywhere".

30-1 and up leverage never has been and never will be safe, necessary, or a good idea. Not for Fannie and Freddie, not for investment banks, not for Citi and Wamu, not for LTCM, not for the Euro banks, not for individual mortgage borrowers.

Never, for anyone, ever, a good idea. Far, far, far more destabilizing than something like HFT.

1 rule and you can pretty much put a cap on how badly things can get blown up. Limit everyone everywhere to 10-1 leverage.

We can live with a slightly lower, more consistent growth rate.

[Toddward]

#2 is crucial - Glass-Steagall should never have been repealed.

[jacoblyles]

Why? The institutions that got in trouble during 2008 had no retail banking arms (Bear, Lehman, Fannie & Freddie, Merrill, etc.). Glass Steagall is a red herring. Proprietary traders were largely not using deposits to finance their bets.

[harryh]

Why? Do you even know why Glass-Steagall did?

The strictly investment banks (as opposed to the consolidated ones) were the ones that had the most trouble / caused the most problems in the recent recession.

[Toddward]

This will be a response to this parent and the one that posed essentially the same point.

I don't believe I referred to anything regarding the recent recession or who was to blame. My problem with the repeal of Glass-Steagall has more to do with the overwhelming conflict of interest it could create within these institutions (i.e., using deposits to grant credit to the investment arms for making risky bets). On the flip side, you could argue that proper regulation could stymie that risk, but I'd rather just not leave it up to chance (read: politicians). That's my opinion - you may feel differently.

[natrius]

On transparency, I've come to believe that it should be the government's role to make data available and the private sector's role to compete with each other to create the most useful tools with that data. I might be biased since the latter is my job, but I think it works fairly well. The "Surgeon General's Warning" you suggest is an interesting idea that doesn't really work without the government putting a lot of the tools together themselves, though.

[michaelcampbell]

I'm really torn on #5. My pragmatic side says "hell yes", due to the very human nature law of those that most want to govern are the ones we least want doing it.

But... my rights side says all that is doing is taking away my right to vote for whom I want.

[peteretep]

Also: we happily assume most professions get more experienced and more effective the longer they've been doing their job. Do we really want to kick out national leadership just as they're getting in to the swing of it? Perhaps, but it's far from clear cut

[mc32]

I'd change it to disallow consecutive terms --yet as many terms so long as not consecutive

[burgerbrain]

Then you end up with a situation like they have in Russia:

  1999-2000:
    Prime Minister: Putin
  2000-2008:
    President: Putin
  2008-2012:
    Prime Minister: Putin
  2012-2016 (anticipated):
    President: Putin

[mc32]

That's pretty declarative. You seem pretty sure the situation in the States would be comparable to that in Russia --I think that's a very tenuous stretch.

It happens in Russia because they have collusion. Presumably we would have less chance of that happening as other candidates would be free to join in on the political race. There is non-such in Putin's Russia.

In Russia, candidacies are controlled (and those two had an "understanding"), so you end up with that. Anyhow, Russia is an exception. Why do you bother bringing up an exception as in this case it would appear irrelevant?

What we do have is people who, due to name establishment (incumbency) recognition and or party backing, end up stringing together many terms --this alternative, would at least break that pattern up and give other candidates a chance due to stalled momentum (of the what would have been incumbent). It's seems an obvious difference to me.

[burgerbrain]

I see no reason it wouldn't happen in the US in areas where term limits might otherwise be needed.

[mc32]

Have you seen it happen where candidates are vetted by the state and only allow those it blesses?

I don't see a parallel. I think you're reaching very very far.

[danssig]

You have some good points here, but I tend to disagree with term limits. Things take time to fix. Terms are 2 to 4 years. That's not enough time for the effects of big changes to really show up.

[ericdykstra]

Any candidates that actually pushed for these things would instantly get my vote. Too bad pretty much every candidate is a politician, which by definition means they oppose #1.

[wccrawford]

Except that one candidate.