High-Frequency Trading
“High-frequency trading,” as practiced at Goldman Sachs, where you use super-fast computers to get a jump on deals, has come in for a lot of criticism lately reaching all the way up to Paul Krugman. I think these critiques are a bit off base. For one thing, no edge that Goldman has acquired based on using fast computers is going to stay in place for very long. For another thing, the “victims” here are just going to be other Wall Street types. Normal people have no business making investment decisions that depend on to-the-minute timing.
I think Krugman gets to the real crux of the matter when he just shifts to broader issues:
What should be done? Last week the House passed a bill setting rules for pay packages at a wide range of financial institutions. That would be a step in the right direction. But it really should be accompanied by much broader regulation of financial practices — and, I would argue, by higher tax rates on supersized incomes.
I have been honestly astounded by the extent to which there hasn’t been more discussion on this point. There’s no good reason that an income of $250,000 should be taxed at the same rate as an income of $2.5 million or $25 million or $250 million. And taxing super-rich people and using the money to build schools and hospitals and transportation infrastructure is, if slightly crude, a more workable method of trying to align the interests of the hyper-wealthy with those of the rest of us than is having various economists debate exactly which money-making activities out there are really socially valuable.
I’ve tried to emphasize the fact that to finance a really expansive welfare state you need a broader tax base than just “the top one percent.” But that’s no reason that the top 0.1 percent and 0.01 percent and 0.001 percent shouldn’t pay their share. There’s only so much money that can be raised from what is, at the end of the day, a very small number of people. But we should still be raising it!
66 Responses to “High-Frequency Trading”
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August 4th, 2009 at 12:19 pm
For another thing, the “victims” here are just going to be other Wall Street types. Normal people have no business making investment decisions that depend on to-the-minute timing.
I believe the “other Wall Street types” are using the money of “normal people” when they make investments. I’m happy to be corrected, but I’m not sure your analysis stands.
August 4th, 2009 at 12:21 pm
Every time someone like you says that, we lose credibility. They pay their “share.” And the share of hundreds of others. Remember Sam Seaborn from West Wing:
“Henry, last fall every time your boss got on the stump and said it’s time for the rich to pay their fair share – I hid under a couch and changed my name. I left Gage Whitney making 400,000$ a year, which means I paid 27 times the national avarege in income tax. I paid my fair share and the fair share of 26 other people. And I’m happy to, cause that’s the only way it’s gonna work, and it is in my best interest the everybody be able to go to school and drive on roads – but I don’t get 27 votes on election day, the fire department doesn’t come to my house 27 times faster and the water doesn’t come out of my faucet 27 times hotter. the top percent of wage earners in this country pay for 22 percent of this country. Let’s not call them names while they’re doing it is all I’m saying!”
August 4th, 2009 at 12:22 pm
It is a no-brainer. The most rich in any year should pay more, it’s government money, and there’s no disincentive that’s credible. If you make $50 million, you really didn’t earn it, compared to the average folk, and you will still live heartily with $25 million, but maybe that’s what they pay already, I wouldn’t know.
I would draw the line at government ever taking more than 50% though, it is what it is, and income tax is the biggest sin in this world to begin with (consumption tax is more moral).
Why would you agree to the government analyzing all your income and property? This country went totalitarian a long time before people realize.
August 4th, 2009 at 12:27 pm
Wiki: Front Running
Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers. When orders previously submitted by its customers will predictably affect the price of the security, purchasing first for its own account gives the broker an unfair advantage, since it can expect to close out its position at a profit based on the new price level. Front running may involve either buying (where the broker buys for their account, before filling customer buy orders that drive up the price) or selling (where the broker sells for its own account, before filling customer sell orders that drive down the price).
Allegations of front running occasionally arise in stock and commodity exchanges, in scandals concerning floor brokers and exchange specialists.
http://en.wikipedia.org/wiki/Front_running
August 4th, 2009 at 12:29 pm
“no edge that Goldman has acquired based on using fast computers is going to stay in place for very long. ”
Based on what? Goldman has this advantage not due to rooms of super computers but because of who they are. And keep in mind the real estate bubble was just a temporary thing as well.
August 4th, 2009 at 12:30 pm
Remember Sam Seaborn from West Wing:
Oh. My. Gawd. Yeah, it’s definitely Yglesias’s credibility that’s taking a hit.
August 4th, 2009 at 12:34 pm
Krugman’s claim is that the high frequency trading raises the cost of capital and therefore lowers growth. Taxing rich people doesn’t correct that. Also if you are going to create a new higher income tax bracket you probably need to do something about capital gains as well. Otherwise people will just find ways to convert their income into capital gains.
August 4th, 2009 at 12:40 pm
I think Krugman is wrong about high-frequency trading, at least to the extent it doesn’t actually depend on non-public information. That is the sort of thing that actually makes the financial markets highly efficient, and that is good for passive investors: you don’t need to waste time and effort worrying about market inefficiencies because entities like Goldman are eliminating any such inefficiencies extremely quickly.
The problem is that a lot of individual retail investors have been convinced that they, or someone they can hire, can actually “beat the market” using only public information and short-term trades in a world populated with entities like Goldman and their supercomputers. Those investors are nuts to think that, and that is what is actually causing the bulk of the “tax on investors who lack access to those superfast computers”: it doesn’t go to Goldman as much as it goes to a retail investment industry designed to extract fees from these retail investors for no good purpose.
August 4th, 2009 at 12:40 pm
Why not make corporate taxes progressive?
August 4th, 2009 at 12:42 pm
# Bernard Finel Says:
August 4th, 2009 at 12:21 pm
But that’s no reason that the top 0.1 percent and 0.01 percent and 0.001 percent shouldn’t pay their share.
Every time someone like you says that, we lose credibility. They pay their “share.” And the share of hundreds of others. Remember Sam Seaborn from West Wing:
blah blah blah
Every time someone posts this kind of nonsense, they lose THEIR credibility. The charts and graphs have been posted over and over again; the top earners in this country actually pay a smaller percentage of their income in taxes than does the middle.
August 4th, 2009 at 12:42 pm
I am very much in favor of highly progressive taxes (90% on the highest incomes, which applied in the past), but that isn’t enough.
Financial markets also need to be restructured. The first rule change should be that anyone trading in a market cannot have a management, ownership or other influence over that market. Operation of a market and trading in that market must be completely exclusive.
There should also be very rigid controls on the types of loans depository institutions can make, especially as regards financial speculation.
August 4th, 2009 at 12:44 pm
Yes, and super wealthy people will, after reflecting on the obvious wisdom of Matthew Yglesias, simply allow these higher rates to take effect. They won’t employ their resources to gain access to Congress, and thus come up with ever more complex definitions of “income” or “expenses”, resulting in an ever larger and more complex tax code which distorts the economy to an ever larger degree.
Do I think it would be a big deal, in isolation, if somebody who made 250 million paid substantially more than someone who made 250 thousand? No. I also think it would be nice, in isolation, if people didn’t intoxicate themselves with the derivatives of poppy plants. The problem is that you cannot get to those states in isolation, and trying to get to those states inevitably means that people with substantial resources and intelligence will try to thwart the movement to those states, with substantial ill effects.
If one thinks a horribly complex and economically distortive tax code is the preferred state of affairs, trying to tax the top 1% of income earners at a substantially higher rate will just about guarantee that you get one. The worst aspect of someone making 250 million comes into play when the owners of the enterprise really haven’t given consent to that sort of compensation, and that sort of principal/agent problem is all too frequent in publicly held corporations. Simply taxing high incomes at a higher rate doesn’t address that problem however, and it may make sense to require such incomes to be substantially deferred, in the form of stock grants which cannot be sold until after the earner has left the firm for a substantial period. This might align the incentives such that the earner has the most socially productive time horizon when managing the enterprise, and the needed devotion to building a deep management bench.
August 4th, 2009 at 12:47 pm
DTM @8, can you define “inefficient” as you are using it? I was a little startled recently, when I found that “efficent” as used in similar contexts (such as “the efficient markets hypothesis”) actually means something like “not predictable,” or perhaps “no information remains which can be exploited to profit.” So I’m not sure if you are using it in that sense – where you would basically be saying, “Goldman’s HFT equipment lets them jump in and get the profit before anyone else can” – or in the more general sense of “working better.”
August 4th, 2009 at 12:48 pm
Taxing rich people at a confiscatory level lowers the incentives to become rich, and moves motivations to more socially useful projects. This is not merely a very good thing, but a necessary thing.
But we should increase taxes all the way down, so that middle management choose to volunteer to be a kid soccer coach rather than working an extra 6 hours.
Contra sandwichman, I don’t think the gov’t can impose a shorter workweek. We can make it unprofitable.
August 4th, 2009 at 12:49 pm
14 s/b we can make overtime unprofitable.
August 4th, 2009 at 12:51 pm
Every time someone like you says that, we lose credibility. They pay their “share.” And the share of hundreds of others. Remember Sam Seaborn from West Wing:
Ah yes, what we should do is THANK Goldman Sachs honchos for making a shitload of money after bailing them out, providing an arbitrarily large amount of capital to their largest counterparty when it was about to go bankrupt, and buying any manner of crap that they’d like to get off their balance sheet at vastly inflated, not remotely market-driven prices. Oh, and failing to do the same for some of their largest competitors, ridding their marketplace of much competition.
Yes, it’s only due to the largesse and innate kindness of the good fellows of Broad Street that our government even exists. We better not do anything to fall out of their good graces.
August 4th, 2009 at 12:57 pm
I’m totally down with more income tax brackets. But, what we need is a sophisticated capital gains tax structure. We could allow anyone ~$5 million in tax free capital gains in their life time and then tax it progressively from there. Many of the wall street reported incomes, especially in the hedge fund and private equity space, is actually capital gains and is often taxed at 20%, which is just absurdly low (9 figure earners could afford to contribute more).
August 4th, 2009 at 12:59 pm
NY Times has an article today re a large scale study showing that people who are laid off –especially in a recession — rarely get back to their income level even 10 years later. Most stuck in low-income McJobs, even with college education.
The Comments section is scathing about the deceit practiced by globalization advocates and Republican whores.
We bailed out Wall Street, Big Auto , Big Oil and Big Defense. Who is going to bail out Medicare and the Middle Class?
August 4th, 2009 at 1:00 pm
Yeah, the problem is a lack of “sophistication” in the tax code of the United States.
August 4th, 2009 at 1:06 pm
No need to worry about high-frequency trading. I have always believed we needed to speed-up Wall Street. Replace that old Ferrari engine with Warp Drive.
For one thing, high-frequency trading will make it easier for short sellers to crash businesses. And they can do it in minutes, instead of days. Such “creative destruction” is a beautiful and necessary thing -it helps maintain the purity of the Free Market- and high-frequency trading will just enhance Wall Street’s destructive power.
I would like to issue a light warning to start-up companies, however. DON’T GO PUBLIC!
August 4th, 2009 at 1:07 pm
Here’s NY Times article re long term income loss from layoffs:
http://www.nytimes.com/2009/08/04/us/04layoffs.html?_r=1&hp
August 4th, 2009 at 1:11 pm
The only way for the market to be brought back to its original purpose; i.e., an investment mechanism, rather than a form of gambling, is to impose variable taxes. I suggest 90% on any asset held less than a year, varying down to 10% on assets held for 10 years. The “instant” trading would go away if the taxes were high enough.
August 4th, 2009 at 1:17 pm
Two things about federal tax rates. First, someone with compensation of $100,000 per year is paying marginal federal tax rates of almost 50%, as compared to someone with compensation of, say, $25 million per year who pays a marginal federal tax rate of 35%. Second, that actually understates the inequity, because much of the income of high income taxpayers is capital gains, interest, and dividends, which is taxed at a marginal federal tax rate of 15%. Let’s see, the middle mangager working at X Corp whose inocme is $100,000 pays a marginal federal tax rate of almost 50% but the wizard of Wall Street whose income is $25 million likely pays a marginal federal tax rate of 15%.
August 4th, 2009 at 1:17 pm
I was hoping Krugman would advocate a Transaction Tax, a very small tax that most people would never notice but that would be a strong disincentive for high-volume short-term small-margin speculators, including the business model of the High-Frequency traders.
RE the progressive taxation issue, I’m always amused when folks respond by invoking confiscatory taxation, as if that would happen. As pointed out upthread, rich folks pay a lower percentage of their incomes than do the middle when all taxes are counted, and obviously rich folks have a lot to lose if our social order collapses, arguably more to lose than the poor folks do. In any case, all kinds of data show that all of the wealth generated in the last generation has gone to the top few percent in our country, so based purely on the results it’s pretty obvious that our current tax schemes and the rest of our economy combine to transfer money from the rest of us to the wealthy. Seems to me that rejiggering the system just to achieve the Status Quo Ante Reagan would make sense, and more progressive income taxation is the obvious place to start – though I’m open to other options such as a Wealth Tax.
August 4th, 2009 at 1:18 pm
Oy, seriously, it isn’t that hard.
Rich people pay tons of taxes. They pay in much more money than the poor or middle class.
It is also true that their tax “burden” in the sense of their ability to pay is lower than for most.
They pay more AND they can afford to pay more. But, saying that they need to “pay their share” is meaningless given the actual amount paid by the wealthy.
They pay their share and the share of others too, and they could probably pay even more.
See, none of those statements is contradictory.
As a matter of political communication, though, the simplistic statement that the rich should “pay their share” as a justification for higher marginal rates on the superwealthy is counterproductive.
I agree with Matt. I think it would make sense to have additional brackets. But you are not going to get them with simpleminded sloganeering to the base.
August 4th, 2009 at 1:31 pm
Yes, warren, the status quo ante Reagan, when, for instance, people were able to deduct credit card interest against ordinary income, really did promote the kind of behavior we desire.
August 4th, 2009 at 1:37 pm
Will Allen, my point was about bringing back an earlier wealth distribution, not about bringing back all details of the 70s, or even its tax code. I happen also not to be a fan of leaded gasoline, muttonchop sideburns, or shag carpeting. Just so you don’t hang those around my neck as well.
August 4th, 2009 at 1:42 pm
Your error, warren, is in thinking that you can obtain the aspects of that tax code which you desire, without also obtaining the aspects of that tax code which you do not desire. Guess what? The 536 people you are attempting to persuade will not only be listening to you, and the people who agree with you.
August 4th, 2009 at 1:47 pm
From my point of view, as an average middleware/business process modeling engineer, automated High Frecuency Trading it’s a very dangerous thing.
To be able of doing it you not only need a big computing power, but you also need to model algorithms to predict the behaviour of human or not so fast computer traders.
First it’s not a matter of time that Goldman Sachs will be matched by other players, they will always have an advantage because that kind of analysis and modelling it’s actually very expensive and difficult to achieve. And they will also have access to more information than the rest of the market.
But it is even worst: at the end you are adding lots of correlation to the movements of prizes, which it’s partially the origin of this crisis (read Nassim Nicholas Taleb “The Black Swan” to know more about it).
You are destroying the human factor in risk taking and investment analysis, which is what actually drives innovation and start up investment. If you automate capital markets, then nobody can raise money for a company with some valuable asset, because supercomputers are going to thrash everyone wanting to make an honest investment.
We need to stop this mess and the destructive use of IT in capital markets.
The Tobin Tax(an small public comission aka tax over every transaction) is the way to stop this and commit players in capital markets to real investment.
If not, we are going to see bigger and stronger players taking control of public markets faster and faster.
Ok, maybe this way we are going to finally destroy capitalism and globalization, which may be the only way to stop greed destroying our lives.
August 4th, 2009 at 1:49 pm
It’s just impossible to raise taxes on the rich in the US now. Remember that the top tax rate was 90% under Roosevelt; also remember that there is now a Democratic super-majority in Congress and a Democrat in the White House. Yet it is impossible to raise taxes on millionaires, because it would deeply hurt the most sacred values of Nelson and Bayh.
The rich own Congress, and that is the root of all other problems.
August 4th, 2009 at 1:56 pm
I’m in favor of high taxes on ultra-short term capital gains. A 70% tax on capital gains from securities held less than 24 hours would do nicely…
August 4th, 2009 at 1:58 pm
Will Allen, you seem not to be understanding me. In saying that the shift in the wealth distribution to the wealthy over the last thirty or forty years should be counteracted I am not saying that the solution necessarily lies in bringing back any aspect of the tax code we had back then, or that any changes to the tax code aimed at reversing the shift should be described in such a manner. By responding to me as you have done, pointing out provisions in 1970s tax law that nobody wants reinstated, you persist in your incomprehension. I don’t care how we get back to a society less stratified by wealth, but if – as you seem to impute I am suggesting – I thought bringing back Gerry Ford’s tax code, or bell bottoms for that matter, would do it, I’d advocate that. As I don’t, in fact, think that, my suggestion is both less detailed and less ridiculous.
August 4th, 2009 at 2:01 pm
Bernard Finel:
“Every time someone like you says that, we lose credibility. They pay their “share.” And the share of hundreds of others. Remember Sam Seaborn from West Wing:”
Ah yes, what we should do is THANK Goldman Sachs honchos for making a shitload of money after bailing them out, providing an arbitrarily large amount of capital to their largest counterparty when it was about to go bankrupt, and buying any manner of crap that they’d like to get off their balance sheet at vastly inflated, not remotely market-driven prices. Oh, and failing to do the same for some of their largest competitors, ridding their marketplace of much competition.
And JP Morgan Chase, etc., etc. Given people still think like Mr. Finel, maybe it would have been better had the economy actually fallen into the abyss. We were so close, but Bernanke saved the day.
25+% unemployment, global depression, politics gone insane, with the ginormous mob with torches and pitchforks the Sam Seaborn types like Mr. Finel would be a little less sensitive about being asked to “pay their fair share.”
Really, the elite Sam Seaborn types utterly failed us. The media, the banks, the big investment house which promptly turned into banks to get bailout funds when panic struck, the government, Congress, academics, the Clinton administration, of course Conservatives too mainly, but pretty much all the Sam Seaborn types in various industries. And they are so arrogant they don’t even realize what a near miss it was.
August 4th, 2009 at 2:03 pm
The Tobin Tax(an small public comission aka tax over every transaction) is the way to stop this and commit players in capital markets to real investment.
If not, we are going to see bigger and stronger players taking control of public markets faster and faster.
I agree with Hector!!!
August 4th, 2009 at 2:09 pm
I think you might misunderstand how this works. In technical terms it uses a high volume of small trades to manipulate a price such that Goldman Sachs has opportunities to arbitrage.
What manipulating the price means in terms of everyday people, even people that don’t care too much about the timing of their purchase is either (1) higher brokerage fees than expected, (2) The broker telling them that the stock they thought they were getting for $40 a share cost them $41 a share. In other words, the costs on the “Wall Street Types” gets passed on to the consumer.
These costs add up, and that difference in price is going to Goldman’s profits. Is each individual arbitrage a large evil? Certainly not. It is a large number of very small rip-offs.
Despite its negative social utility, however, I’m not sure that I see a problem with this technology. Right now it works for Goldman. Soon other firms will start using it. This will lead to two possible outcomes. #1 Positive feedback or #2 Negative feedback.
#1 Positive Feedback: The price swings out of control, and all the sudden Goldman loses a fortune. (Think Megahertz bidding war) This happened before with computerized trading in the 80s and lead to a crash. It could easily happen again.
#2 Negative feedback: The price starts reaching equilibrium much more quickly because of all the attempts at arbitrage. Prices end up less sticky and the market ends up more efficient, but individual profits from this activity decline dramatically.
I guarantee you that Goldman doesn’t have a good model of what will happen when other players start using this technology. No one does, modeling a dynamical system that complex is essentially impossible given our current algorithmic knowledge and computing hardware.
My guess is that this is why Goldman is so upset about their code getting out. Two geese laying golden eggs could end up killing both.
August 4th, 2009 at 2:13 pm
DTM @8, can you define “inefficient” as you are using it? I was a little startled recently, when I found that “efficent” as used in similar contexts (such as “the efficient markets hypothesis”) actually means something like “not predictable,” or perhaps “no information remains which can be exploited to profit.”
Yep, I just mean it in the technical sense: hyper-rapid trading by Goldman and its peers quickly eliminates any arbitrage profit you could make from exploiting public information with short-term trades (call that “trading profit”). Of course you can still make a normal profit through investing your savings in worthwhile long-term projects (call that “investment profit”). And I think that is a good thing, at least in theory: it is a waste of resources for lots of people to be expending a lot of time and effort on trying to make trading profits, and instead it is better if most retail investors just focus on making investment profits.
By the way, there are fairly simple ways to deal with things like excessive short-selling, computer algorithms going wonky, and so on.
August 4th, 2009 at 2:16 pm
These costs add up, and that difference in price is going to Goldman’s profits. Is each individual arbitrage a large evil? Certainly not. It is a large number of very small rip-offs.
In other words, like Michael Bolton’s computer program in the movie Office Space.
August 4th, 2009 at 2:16 pm
Re: ‘fair share’
“Every time someone posts this kind of nonsense, they lose THEIR credibility. The charts and graphs have been posted over and over again; the top earners in this country actually pay a smaller percentage of their income in taxes than does the middle.”
And the fire department might not come to their door 27 times as much, but I’ll d*mn well be that they get far more than 27 times my share of attention from Congress.
Will Allen Says:
“Yes, and super wealthy people will, after reflecting on the obvious wisdom of Matthew Yglesias, simply allow these higher rates to take effect. They won’t employ their resources to gain access to Congress, and thus come up with ever more complex definitions of “income” or “expenses”, resulting in an ever larger and more complex tax code which distorts the economy to an ever larger degree.”
With both the income tax and taxes on corporations, the line of the right is simultaneously (a) they won’t pay it (get out of it, pass it along, etc.) and (-a) if it’s enacted, the economy will collapse.
Will, just go back to Chicago, and STFU.
August 4th, 2009 at 2:19 pm
[...] UPDATE #3: Matthew Yglesias [...]
August 4th, 2009 at 2:22 pm
There was a time in America’s history when we had between 15 and 17 federal income tax margins, and the top marginal rate was 70% or more. That tax structure paid off the debt of WWII and Korea and did not prevent America from creating a great middle class of unionized workers and highly-trained professionals.
Then we all got selfish, incredibly selfish.
So of course we had to get rid of the system that worked and return to the tried-and-failed economics of the 1920s, which (despite the Bush 41 and Clinton attempts to prevent it) resulted in a return to the economics of the 1930s.
Today those who make $250 million pay a smaller percentage of their earnings in all taxes than those who make $95,000. That’s why the flat tax is a non-starter, because the taxes on the extremely wealthy would go up while the taxes on the middle class would go down.
It was Warren Buffet who said “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”
Consider the war won.
August 4th, 2009 at 2:22 pm
Warren, you apparently don’t understand yourself. You wrote…
“….so based purely on the results it’s pretty obvious that our current tax schemes and the rest of our economy combine to transfer money from the rest of us to the wealthy. Seems to me that rejiggering the system just to achieve the Status Quo Ante Reagan would make sense, and more progressive income taxation is the obvious place to start…..”
…. thus referencing that state of affairs pre-Reagan, with regard to tax schemes, as being preferable to what is now in place. This is false, unless one indulges in the fiction that one can obtain more progressive income tax brackets without setting into place incentives for highly motivated, highly intelligent people, with substantial resources, to counteract those brackets with extremely economically distortive exceptions, loopholes, and deductions. Those highly intelligent, highly motivated, people with substantial resources will inevitably succeed to a degree which will likely counteract any benefit you envision obtaining via your preferred tax brackets.
August 4th, 2009 at 2:28 pm
Barry, just go read the tax code circa 1960, and STFU.
August 4th, 2009 at 2:40 pm
#33
I know nobody can model a dynamic system after a certain degree of complexity(actually a very little one). I may have been a little bit vague about my real argument (and I’m not an expert in the field as well, so i’m not too sharp when talking about it)
My point was different: if you can make faster bets(and smaller) than the rest of the market, you can make simple models to take advantage of them in the short tem.
If they try to match you, just go a little bit faster. It’s an arms race, and stronger players are going to be one step ahead always
But at the end, what they are doing it’s reinforcing the trends of the market aka autocorrelation.
They are also kicking smaller players out of the game.
And connecting with your analysis: what you say of positive and negative reinforcing it’s not a 50/50 possibility.
In the same way than analysis of dynamic systems it’s very difficult and almost impossible, it’s also an extremely odd possibility to have such a complex system like this to be stable (negative feedback).
We need (as Paul Krugman and Nassim Taleb has said a lot of times) to slow down capital markets, to get rid of the gambling part of it and to take it back to what it was: a centralised access to investors and entepreneurs to raise capitals.
Once again, Tobin tax it’s a way to stop this mess.
Don’t forget Tobin was a second geration Keynes, who focused his analysis in markets rather than fiscal policy: he wanted to stabilize capitalist system to avoid ciclycal crisis.
Crisis in the economy in general are recessions and depressions, in markets they are bubbles, ans that’s what we gotta stop before a global(or western) economical meltdown.
August 4th, 2009 at 2:49 pm
No the victims are not necessarily other Wall Street banks. The losing person might be you Mr Yglesias, buying an etf for your retirment saveings. The issue here is that at some point, the extra liquidity is not worth it anymore. It does not really matter if Goldman makes much money with that extreme tradeing. The point is that the work high qualified people put into into this extreme tradeing systems does not add anything to society as a whole. Even if those people are paid less than they would get at another similar qualified job, that would still be bad for society. So taxes are no solution for this. Think of this tradeing like of military spending. We would all be better off if no country had a notable army. Similar with that tradeing. A bit of it is usefull to provide liquidity, but the extend today is of no use for society as a whole.
August 4th, 2009 at 2:54 pm
#2 Negative feedback: The price starts reaching equilibrium much more quickly because of all the attempts at arbitrage. Prices end up less sticky and the market ends up more efficient, but individual profits from this activity decline dramatically.
This is what happens. Goldman Sachs is far from the only company exploiting HFT. The fastest/smartest adapt and profit and the slower/dumber HFT traders decline over time and go out of business.
August 4th, 2009 at 3:05 pm
I think people are conflating some things: actual market manipulation is quite different from exploiting temporary pricing inefficiencies. And high-frequency trading can profit from temporary pricing inefficiencies without actually manipulating any markets.
Anyway, the estimates I have seen suggest that at least in normal times, there is something on the order of tens of billions of dollars annually in exploitable temporary inefficiencies in the global financial markets. That is the pie that Goldman and its peers are competing over (holding aside insider trading, market manipulation, and so on).
Now over time, it may be the case that improvements in technology incorporated into this competition will further reduce the size of this pie–indeed, undoubtedly that pie is much, much smaller in size today because of this ongoing process of improving competition. But it obviously can’t get all the way to zero because then there would be no revenues you could use to buy new supercomputers, develop new methods for identifying and exploiting inefficiencies, and so on.
August 4th, 2009 at 3:16 pm
All this ’share’ stuff is off base. Paying one’s has little to do with matching percentages as such.
August 4th, 2009 at 3:23 pm
GS has been trading as many as 1billion shares a week for it’s own account since March. Not one penny was investment in the traditional sense. Partly as a result they are currently one of the most profitable companies in the world. Do their shareholders take part. Well they see only half the profits in the form of numbers on the balance sheet, the other have goes in cash to a couple of thousand people, and they pay a crummy dividend. Of course their stock price might to to 10,000.
It’s all well and good they are sharp traders but it isn’t all right that they have market power nor that they are speculating with taxpayer money and with leverage supplied by the Fed at ultra low rates. When you consider what they are doing has no systematic upside.
Like everything else these Pigmen do they are introducing systematic risk because these trading mechanisms might blow up then the Treasury or the Fed are sure to intervene in the markets,to save us all from hell, again.
Screw em.
August 4th, 2009 at 3:50 pm
# 48
perfect poi t
cannot be better said what’s going on
get them out of the game before they blow us all again
August 4th, 2009 at 5:30 pm
GS has not invested one penny that flows into a business for investment that hopes to make some positive return on that investment,or makes one job. They are speculating. Some speculation is necessary for the system but yet again the entire system is being geared to take quick capital gains on asset prices.
The returns on speculation are the be all and end all of the system. HFT serves no positive systematic function. Does the economy really need 20 billion shares of stock to trade every week? Of course not.
Short term capital gains should be at a large tax disadvantage. The tax advantage from capital gains went ever more into pure speculation,not investment. It was a foundational cause of the problem. It was the driver of asset and income mal distribution. Not that everyone else would have been richer,but everyone saw how not work but speculation was the way to go and it has had a profoundly negative social and economic effect.
August 4th, 2009 at 5:31 pm
the making of fortunes on wall street via short term trading is ruining the basis for business (and capitlaism) in this ocuntry. All investment profits should be taxed at high rates, then discounted for length of investment. This would yield businesses being run to be profitable instead of being run to maximize “shareholder interest.” It is the short term nature of the market that has corrupted virtually every corporate, and even social, environment ove rhte past 50 years. it is the short term hedge funds, which do not care about how badly a company damages its future as long as it stock goes up this quarter that has led to all sorts of disatrous and often self destructive(for the companies and the nation)decisions.
For just a sense of this watch Bill Moyers interview Wendell Potter, former executive at Cigna, for how such behgavior has forced health insurers to go from about 95% of premiums going to medical costs to 80% in just the past 20 years or so.
I say tax capital gains at 75%, then allow discounts of 25 % if investment held for 1 year, 50% for 5 years, 75% for 10 yeasr and 90% for any investment held over 20 years. It would tax those investments that do nothing to help society (sending capital for a month doesn’t do anyone any good except for the speculator) and help those investments that are truly investments cope with the effects of inflation.
Any money recieved by getting your bid in faster than someones else is just stealing from the rest of us. There is only so much to go around, and when the financial houses make billions, and their employees make millions, that is money that should have paid off long term investors.
August 4th, 2009 at 5:32 pm
sorry didn’t know how these links worked. The underlined above is actually the link to Bill Moyers show.
August 4th, 2009 at 5:47 pm
These arguments are somewhat missing the point. The super fast computers are a minor part of the problem. The NYSE is flashing deal information to certain firms a few fractions of a second before the general public… this is the real problem.
August 4th, 2009 at 5:48 pm
Alan, that is approximately correct but those rates are beyond impossible to legislate.
The dirty secret is that to a quite large extent America was founded upon gaining wealth from asset inflation. At first it was land. George Washington was a land speculator. Almost every American thinks they might strike it rich on ‘investment’. That is the American dream.
Which is why there is universal support for easy credit and easy money. For both go to the purpose of inflating asset prices. A tax rate on short term capital gains higher than ordinary income is necessary, and impossible.
Every single thing done by the Fed and the Treasury has been done with the intent to reflate assets or at least stop their deflation. Trillions have been put to the task,and it is biting now,just look at the stock market. To have not done it would have lead to a disaster. To have done it will lead to another. In the meantime assets and income are skewing faster than ever to the top. To the elites.
August 4th, 2009 at 5:58 pm
# Will Allen Says:
“Barry, just go read the tax code circa 1960, and STFU.”
Awwwwwwwwwwwwwwwwwwww………………….
August 4th, 2009 at 6:06 pm
Not really.
http://dealbook.blogs.nytimes.com/2009/08/04/sec-to-seek-flash-trading-ban-schumer-says/?hp
August 4th, 2009 at 6:48 pm
It’s not even been established that they’ve ‘earned’ their share of income/wealth. I’d say that the efficient markets hypothesis is just that – a hypothesis. One for which there does not appear to be a lot of evidence.
Given that some 27-year-old slacker living in his parent’s basement and delivering pizzas part time did more for the economy than Angelo Mozilo ever did, I’d be tempted to say that the evidence that EMH is false is damning. At this point, is there any evidence of a John Galt type who in the last decade made his pile by delivering up the equivalent of the original’s famous motor? A new Rearden metal? Or are all the new Titans by some odd coincidence maneuvering about in the FIRE sector?
August 4th, 2009 at 9:42 pm
To be clear, nothing I wrote above should be construed as a defense of flash trading. To be sure, if the exchanges are going to be flashing order information to some entities for a fee before the rest of the market gets that information, then it is probably a good thing it is so expensive to profit on that early information. But I see no justification for the exchanges doing that in the first place.
August 4th, 2009 at 10:32 pm
I’ve always wondered if I should actually watch The West Wing sometime. So, Bernard, thanks for saving me, well, probably only about 15 minutes.
August 5th, 2009 at 12:45 am
This new EMH talk recently is disturbing. See EMH was always about the price of big capitaliced equities on well regulated markets.
August 5th, 2009 at 12:46 am
While I like the idea of taxing taxing bankers more for HFT, you want to make sure you don’t catch ALL rich people in a high-tax dragnet — while the profits bankers reap through HFT and other means serve no wider social purpose, you want to maintain incentives for entrepreneurs and others to be successful without worry of being taxed to oblivion. That is, socially unproductive ways of getting rich like banking should be taxed more heavily than productive wealth generation. That, of course, is too difficult to enforce or even define; and therefore instead of trying to get that into tax policy, HFT should just be banned or a transaction tax should be levied.
August 5th, 2009 at 4:35 am
Naked short sellers took out Bear Sterns manually. It took them, after several weeks of nipping at their prey, weakening it, two days of old fashioned hard trading to kill it. Timing, coordination, trust, teamwork and phone calls is all took. 35 people. Maybe less.
Think of what blazing fast computers could do. Especially if they are linked to a mainframe in the Wall Street command center, the Depository Trust and Clearing Corporation. Everything goes thru there. Including fake but legal stock put out by short sellers. Put out enough fake stock out fast enough, and you can crash anything. It is conceivable, in an unchecked future, you could destroy, say, Microsoft, in milliseconds.
You are actively forcing the line down when you naked short sell, not just “playing the line” like you do when the line is going up. That is why short selling, done right, is the much better game. But naked shorting is hard to do, hard to set up, because it requires lots of trust between three or four various groups of humans at differing locations. But high speed mainframes? Linked and trading unheard of amounts of stock in seconds?
This is the scariest thing I have ever heard of. Seriously. And I grew with the Bomb.
August 5th, 2009 at 8:38 am
Morgn didn’t get taken down by short sellers. They went under because they lost most of their very short term sources of credit. That came from the international banking giants and the other large investment banks.
While a corporations stock price, especially financial corporations, does play some part in their capital structure such was not the telling event in the sudden crash of Morgan.
It is true that they were bankrupt. So was Lehman and so are Citi and Wells to this day. The latter two still standing because of accounting forbearance and most importantly continued access to ultra short term funding. Admittedly they are banks not investment banks and thus have the Fed to give them that funding but the principal is the same.
Morgan, and Lehman, and Merrill were cut off from short term funding by among others, GS. They drew the short straw. They were taken out and shot. Was AIG taken out and shot? Hell no, they could pay GS and the banking giants $75 billion give or take if Uncle Sam saved them. I am not saying the big 3 investment banks should have been saved but they easily could have been saved with a lot less than the $150+billion that went to AIG.
The failure of the 3 eliminated a huge portion of GS’s competition. In all likelyhood GS or GS associated person were part of the short frenzy that accompanied their collapses. All these events have bo be looked at from a forensic perspective.
August 5th, 2009 at 10:56 am
RE the rich paying their full shared, Not only do the very rich pay less in taxes than people in the middle (because most of their income is capital gains taxed at the 15% rate, not to mention the regressive nature of FICA taxes), but they also get bigger benefits. A person who has a fifteen million dollar house is getting a 150 times greater effective fire and police protection than a person who owns a $100,000 house.
August 6th, 2009 at 1:47 am
If you’re filthy rich before taxes, and you’re still filthy rich after taxes, then your effective tax rate is zero.
August 9th, 2009 at 12:27 pm
[...] No but seriously, this is why instead of trying to regulate the pay of Wall Street executives, we should simply tax ludicrous high incomes at commensurately high rates. Posted in Policy, Politics. Tags: amity shlaes, economy, finance. Leave a Comment [...]