Financial Transaction Tax and the future of HFT

cjbuckley4

cjbuckley4

As a rule, I'm unconditionally sorry I bothered every time I post something subjective or just not related to implementing trading systems on this site. I'm gonna do something I'll probably regret here:

I'm most likely going into the high frequency market making business when I graduate. My concern is the possibility of the implementation of a Financial Transaction Tax. This tax has been touted as directly targeting the HFT industry which, in certain candidates' estimation, adds no value to the financial system. There seems to be a lot of rhetoric and not a lot of actual information about these regulations. How much will we pay? Who's exempt? etc.


I'm trying to assess how much of a threat this poses to my prospective industry. I'm an adult and can form my own political opinions--let's leave me out of this. Although this won't happen, let's try to ignore the inherit political implications here and stay on the topic of how this hypothetical legislation will impact us as short term speculative traders. Is this just campaign rhetoric? Will large institutions block this? I'm sure exchanges are far from thrilled. Will someone in congress step up and explain the value of liquidity in financial markets? What sort of HFT players will survive in this new regime? These are the sorts of things I'd like to discuss.

http://feelthebern.org/bernie-sanders-on-financial-regulation/
 
HFT works on the thinnest of margins. The goal is to make up what is lacked in margin by doing large volumes. This works if you have two things (outside of the tech to make it work):

  • extremely low comissons
  • extremely friendly tax environment
I suspect that HFT will be executed by future firms only by the extremely low cost operators.

As far as liquidity is concerned, that is an argument every one makes, not just HFT firms but MMs in general. It is mostly a mirage. While I do agree that MMs and HFT firms do decrease the bid ask spread during calm markets, neither of them are anywhere to be seen when there is a true need for them - when the volatility picks up by large amounts. Not that I am blaming them, since it is no ones duty to get run over by a speeding locomotive. No privilege you can offer can compensate for being wiped out financially.

Should HFT firms be regulated? Imo, the only thing that should be regulated should be equal access, both in information and support regardless of size of firm. Things like ability to jump queues and keeping certain order types "secret" will work until you piss off someone, and then you not only ruin it for yourself, but for everyone because they will seek vengeance and force regulation on you. Also, the ability to trade in fractions of a penny is absurd, but that is just an extension of being able to jump queues and get in front of someone else that was in line before you.

Outside of a few things that are clearly damaging, what regulators should be focusing on is not killing it, but making it fair access and fair trading for all.

In conclusion, the tax on HFTs is a political statement. It is a societal goal to seek to extract money from the least liked of the financial institutions because other than the liquidity argument, HFTs are deemed to be strictly predatory with no economic reason d'etre.
 
nitro said:
HFT works on the thinnest of margins. The goal is to make up what is lacked in margin by doing large volumes. This works if you have two things (outside of the tech to make it work):

  • extremely low comissons
  • extremely friendly tax environment
I suspect that HFT will be executed by future firms only by the extremely low cost operators.

As far as liquidity is concerned, that is an argument every one makes, not just HFT firms but MMs in general. It is mostly a mirage. While I do agree that MMs and HFT firms do decrease the bid ask spread during calm markets, neither of them are anywhere to be seen when there is a true need for them - when the volatility picks up by large amounts. Not that I am blaming them, since it is no ones duty to get run over by a speeding locomotive. No privilege you can offer can compensate for being wiped out financially.

Should HFT firms be regulated? Imo, the only thing that should be regulated should be equal access, both in information and support regardless of size of firm. Things like ability to jump queues and keeping certain order types "secret" will work until you piss off someone, and then you not only ruin it for yourself, but for everyone because they will seek vengeance and force regulation on you. Also, the ability to trade in fractions of a penny is absurd, but that is just an extension of being able to jump queues and get in front of someone else that was in line before you.

Outside of a few things that are clearly damaging, what regulators should be focusing on is not killing it, but making it fair access and fair trading for all.

In conclusion, the tax on HFTs is a political statement. It is a societal goal to seek to extract money from the least liked of the financial institutions because other than the liquidity argument, HFTs are deemed to be strictly predatory with no economic reason d'etre.
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Well the raison d'être argument cuts both ways. All market participants are in it to win it, it's not like HFT has any less or more validity than speculative trading or investing. Same raison d'être, different motus operandi. If you make money in financial markets as a result of legitimate trading activity, it's because you're providing a service to the market as a whole. Could be the equity you invested getting used to help a company make more money, could be by participating in price discovery, could be providing liquidity, could be none of the above or some linear combination of the above and something else.

I'm not sure the liquidity is a mirage argument works out for me either. There's no fake liquidity, if you see a limit order an HFT posted, they want to it to get hit. As for the jist of your argument, yeah, no one wants to provide liquidity at a loss. I don't think that invalidates the service market makers provide, per my earlier argument, it's my opinion that if someone is getting paid as a result of fair market competition, they're benefitting the market as a whole.

For what it's worth, of course I agree that regulators should be focusing on more fair markets and access for all.
 
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Frankly I'd be VERY surprised if a FTT is ever imposed in the US. If I were concerned about the future of HFT I'd keep a close eye on the results of this gang. Seems that part of their charter is to best (re-)structure the markets to minimize disruptive effects of HFT.
 
DirkDigler said:
Frankly I'd be VERY surprised if a FTT is ever imposed in the US. If I were concerned about the future of HFT I'd keep a close eye on the results of this gang. Seems that part of their charter is to best (re-)structure the markets to minimize disruptive effects of HFT.
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I tend to agree with this, but the whole FTT issue is concerning nonetheless. Hating on HFT because you don't understand it and it makes money is reminiscent of some other pretty dangerous ideas we've seen throughout history. I would hope the country doesn't buy into this rhetoric, but I'm not optimistic. Americans love to hate on people, especially if they can be deluded into thinking said people are skimming money from the system while contributing nothing. Thankfully, both buy side and sell side institutions are probably going to pretty much unanimously lobby against this. Even if lobbyists can't sway Bernie Sanders, they can definitely sway congress. I doubt it will happen, but I'm still concerned about the general attitude.
 
cjbuckley4 said:
Well the raison d'être argument cuts both ways. All market participants are in it to win it, it's not like HFT has any less or more validity than speculative trading or investing. Same raison d'être, different motus operandi. If you make money in financial markets as a result of legitimate trading activity, it's because you're providing a service to the market as a whole. Could be the equity you invested getting used to help a company make more money, could be by participating in price discovery, could be providing liquidity, could be none of the above or some linear combination of the above and something else.

I'm not sure the liquidity is a mirage argument works out for me either. There's no fake liquidity, if you see a limit order an HFT posted, they want to it to get hit. As for the just of your argument, yeah, no one wants to provide liquidity at a loss. I don't think that invalidates the service market makers provide, per my earlier argument, it's my opinion that if someone is getting paid as a result of fair market competition, they're benefitting the market as a whole.

For what it's worth, of course I agree that regulators should be focusing on more fair markets and access for all.
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I think the argument for other market participants is that they hold positions, and hence provide some economic benefit. Its sort of like this, say you buy a house to simply flip it and not to live in it and be part of a community. Most people view that sort of activity as strictly self serving and acting only as an intermediary to drive prices higher. While living in a house is more of an investment in it and the community. Same thing with ticket scalpers - they don't care about the actual performance, but instead in the arbitrage of some inefficiency in ticket sales.

While this distinction is harder to make in financial markets because the only function, once the company has raised money by IPO, is to speculate on the activity of the company and is therefore one step removed from real economic value, people view HFT like ticket scalpers and the rest of speculation more like "investing" in the economy.

I am not saying this is or isn't a silly distinction, I am saying that is the perception. Look, all the rules against short selling are ten times more egregious imo than anything HFT does. If a company is being sold to manipulate the stock, why doesn't the company and the rest of the market step in if it is trading below its "true value"? That should be a clue that anything that messes with the establishment of equities is deemed bad business, for the establishment.

That is why I don't bother with equities much anymore. I have discussed these views here: http://www.elitetrader.com/et/index.php?threads/investing-catechism.180234/
 
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nitro said:
I think the argument for other market participants is that they hold positions, and hence provide some economic benefit. Its sort of like this, say you buy a house to simply flip it and not to live in it and be part of a community. Most people view that sort of activity as strictly self serving and acting only as an intermediary to drive prices higher. Same thing with ticket scalpers - they don't care about the actual performance, but instead in the arbitrage of some inefficiency in ticket sales.

While this distinction is harder to make in financial markets because the only function, once the company has raised money by IPO, is to speculate, people view HFT like ticket scalpers and the rest of speculation more like "investing" in the economy.

I am not saying this is a silly distinction, I am saying that is the perception.
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I agree with your summary of society's perception. I find their understanding of HFT to be naive, disappointingly limited, and dangerous for financial markets.
 
Speculators of all sizes make markets and provide liquidity. In doing so, they absorb risk, benefiting more conservative market participants such as investors and hedgers. By providing liquidity and making markets and absorbing risk, they (we) have a right to make a profit. There is nothing illicit or immoral about legal speculation.
 
speedo said:
Speculators of all sizes make markets and provide liquidity. In doing so, they absorb risk, benefiting more conservative market participants such as investors and hedgers. By providing liquidity and making markets and absorbing risk, they (we) have a right to make a profit. There is nothing illicit or immoral about legal speculation.
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Well said.
 
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