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by kasey_junk
4456 days ago
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On the transaction count issue, I agree that there may be some societal good to removing sham or gaming trades from the markets, but that is not what a transaction tax targets, it targets all transactions whether they are shams or not. Further a transaction tax raises the cost of entry for all market participants, without providing any disincentive to those making sham trades. It's possible that HFT is a volatility amplifier, it's hard to judge though because HFT rose when other macro market forces were driving huge amounts of volatility into the markets. One thing I think most people will agree on is that market segmentation and electronic access drove down the price of trading dramatically for everyone and enabled a variety of extremely useful investment vehicles for the "retail" investor (I'm thinking of ETFs especially). Any system that has market segmentation and electronic access will also enable algorithmic trading. My opinion is that it is foolish to throw out all the positive benefits in the name of some artificial "fairness" between human and computer traders. Chris Stucchio has a good explanation about the mechanics of market making at http://www.chrisstucchio.com/blog/2012/hft_apology.html Understanding those mechanics we can see that any added costs that the market maker bears must be reflected in their trades and will eventually drive them to increase their spread on the order books. If enough of the market makers do this it will increase the spread which is the biggest driving cost in trading after operational costs. Capital gains and dividends are a mechanism to make capital aquisition possible. They happen to be the attributes of the capital markets that you are most interested in but there is nothing sacred about them (in fact lots shares lose capital and many companies don't pay dividends). For many other market participants hedging against inflation risk is vastly more important than dividends for instance. My opinion is that we should enable a system that allows for as open of access as possible to these markets for as cheap a cost without bias towards whats most important to any class of market participant. It is also my opinion that HFT actually does these things and that is why they are so scary to hedge funds and big banks. I am also not a Chicagoan (well in an economic sense) and you are right over liquidity may be some sort of market failure. As someone who sells liquidity I will tell you that the price of it is currently being propped up with legislation. If it weren't for the sub-penny rule the spreads on some commonly traded instruments would be much smaller than they currently are. I'd also say if you figured out a way to remove some of the liquidity in the system without increasing my costs I'd appreciate it as this whole competing in an efficient market thing is for the birds. |
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