Robin Hood, nearing European victories, still struggling to awaken in the U.S.
July 30, 2012 — Concerns about the market-destabilizing effect of speculative, “high-frequency” trading, along with a desire to generate more revenue for governmental programs from a financial sector seen as not paying its fair share of taxes, have stirred calls for the imposition, or re-imposition, of a financial transactions tax (FTT) both in Europe and the United States.
More popularly known as a Robin Hood tax, most versions of an FTT have proposed imposing a small fee on stock, bond, and derivative transactions (derivatives include, among other things, currency and commodity futures as well as mortgage-backed securities). In Europe, a rate as high as 0.1 percent has been discussed; in the U.S., most proposals call for a lower rate. One of several FTT bills currently pending in Congress is the Wall Street Trading and Speculators Tax Act, authored by Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.). The Harkin-Defazio bill calls for a levy of 0.03 percent on the value of a transaction.
Most experts agree that the FTT would have little impact on average investors. At the Harkin-Defazio rate, for example, an investor would pay $3 for every $10,000 invested.
However, an FTT would deter, at least to some extent, the volume of trading, particularly high-frequency trading. This kind of superfast trading didn’t meaningfully exist prior to the mid-1990s, but rose by 2008 to capture — and since retain — more than 50 percent of equity trading in the U.S., peaking at over 60 percent in 2009, according to Adam Sussman, director of research at TABB Group, a financial market research firm.
High-frequency trading is typically the province of financial firms that use customized and proprietary computer programs to trade large blocks of shares — sometimes millions of shares at a time — with the intention of reselling them quickily, sometimes only seconds later, rather than holding them as an investment.
The extent to which high-frequency trading would be deterred by an FTT and the desirability of doing so remain in dispute.
Several countries in the EU, including Germany, France, Italy, and Spain, are expected to enact a joint FTT, perhaps as early as next year. France’s own version of an FTT will go into effect this August. In England, where there has been a stand-alone FTT (on stock transactions only) since 1986, Conservative Prime Minister David Cameron has aggressively opposed the institution of an EU-wide FTT that would encompass bond and derivatives trading as well. While Cameron has been successful thus far in forestalling English participation in an EU-wide FTT, there appears to be widespread and organized domestic support for a broader FTT.
By contrast, in the U.S., which had an FTT from 1914 until 1966, support for a new FTT has only just begun to grow, with no real political momentum as of yet.
A critical factor: in other countries, even some center-right politicians, like Nicolas Sarkozy and Angela Merkel, have strongly supported an FTT. Here in the U.S., the national Democratic Party has made no effort to embrace such a proposal. Some suggest that the torpor of most Democrats is a function of the influence wielded by the financial sector in the U.S.
Some FTT supporters see a primary goal of the tax as reducing the scope and volume of high-frequency trading. In this view, high-frequency trading contributes to market volatility and diverts capital that could otherwise be used to boost innovation and invest in companies that create jobs.
The reason that an FTT could squelch high-frequency trading, at least in part, is that the profitability of the practice typically depends on traders taking advantage of small and fleeting price discrepancies, as between a single stock’s asking price on two different stock exchanges or slight price differences between related products. By engaging in a very high volume of large-block trading and by holding shares or other investments for sometimes as little as milliseconds, high-frequency traders generate significant profits (at the peak in 2008, high-frequency traders yielded net trading profits in the U.S. totaling $8 to 20 billion).