[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.