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back to article Rise of the Machines: How computers took over the stock market

Trading used to be limited by how fast one human could shout at another and agree upon a price. Now it's limited by the speed of an electron through copper wire. This has caused, to put it mildly, some changes. In April 2013 bombs went off at the White House and Barack Obama was injured, the Associated Press reported. The news …

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Happy

There is nothing so complicated that, with their talent for ingenuity, humans cannot make even more complicated. This applies to IT as much as it applies to finance.

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Headmaster

Starting with giving everything an acronym, preferrably a three-letter one.

Need to be a ruddy computer just to keep track of the ones in the article, let alone actually understand what the hell is being talked about.

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Terminator

It's the future

And it's been here for some time.

Which makes it the past actually.

Either way, we're pawns.

That's all the internet was ever about... pwnography.

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Anonymous Coward

@AndrueC - To err is human

but to screw things up thoroughly, you definitely need IT

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Thumb Up

Re: It's the future

"That's all the internet was ever about... pwnography."

Quality.

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"Now it's limited by the speed of light through copper wire."

For light to have a speed in copper they must be using tubes rather than wires.

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FAIL

Oh dear...

Listen child, electricity, what is that stuff being stuffed down the copper wires travels at the speed of light. Some people even think light speed in a solid is slightly faster than the speed of light in a vacuum, but there's a lot of faffing about in that debate.

Regardless, electric signals move at the speed of light. And not in tubes, they're always running late so don't serve as a good metaphor for speed. But the Tube is a good metaphor for a signalled network...

Hmm...anyway, try to keep the noise down. We're trying to sleep, perchance to dream for what stuff they're made of or something like that.

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Re: Oh dear...

If you're going to be pedantic, it is your responsability to supply correct information.

The speed of the electromagnetic wave is approximately the speed of light in a vacuum. In air, it's not mucj slower. In wires however, it is basically determined by the dielectric constant of the conductor and to some extent of the insulator.

It has, for example, been determined that EM wave speed in coax is in the 65-70% of LS range.

The electron speed, however, is closer to walking speed. In fact, the electrons are more akin to bungling drunk footie supporters than the Millenium Falcon

Have a nice weekend.

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Thumb Down

Re: Oh dear...

Actually dear, electricity (or at least electrons) more very slowly through a copper wire (http://en.wikipedia.org/wiki/Drift_velocity).

The reason things seem to go so quickly is that for one electron to hop across atoms all the others must get out the way and you end up with something sort of resembling a really tiny domino toppling session.

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Trollface

Re: Oh dear...

I wasn't being pedantic, that would have involved some level of precision beyond the means of the level of humour I was attempting to convey.

I was being arrogant to be precise, or pedantic this time.

Muwhahaha!

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Trollface

Re: Oh dear...

I'm personally into throwing a whole bunch of sticks in the air and seeing what pretty patterns they make when they fall.

Science is all well and good when it comes to what it's good at, but it best keep its puny explanations off our's magick!

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Re: Oh dear...

I think you need to do some study of issues like "Velocity Factor" and "Dielectric" before you assert such things.

[I've got rather a lot of experience of this sort of thing and if you can actually get a signal to propagate down a piece of copper wire at the speed of light I can arrange you a cushy job in the phased-array-antenna design department of my current gig].

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Meh

Re: Oh dear...

Then why in your initial post did you refer to light, when you obviously must have known the signal is an electrical one?

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Re: Oh dear...

What's all this about "electrons" and "wave fronts"? I have been reliably informed that it is all down to Magic Blue Smoke ...

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Stop

Performance is everything

I once had a job interview for a test position within a company which provides trading software to one of the world's largest markets.

What surprised (and frankly scared!) me was that, talking to them about usual test planning, automation etc, that they weren't overly concerned about the correctness of the data, but purely focused on the speed.

I guess a few trading packets dropped here and there are nothing compared to selling up shares in DoomedCorp instantly....

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Terminator

To err is human...

...but to efficiently backrupt you requires a computer.

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Re: To err is human...

...but to efficiently backrupt you before you know it requires a computer.

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Headmaster

Re: To err is human...

But to copy and paste someone elses' spelling mistake is special

:-)

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Re: To err is human...

It's not that the boys running wall street were fully human; arguably more than the computers that start to replace them but not that much more.

M

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Mushroom

Time for a legislated 'tic - tock' / limited number of trades per day, for trades to occur, and limit the damage that can occur due to HFT.

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@InLog

I disagree for many reasons. The first being the obvious one: people pay to be able to trade on the stock market. So where the article says that in some transactions millions were lost, the other side of such situations is that there were also plenty of people who made lots of money out of it. Its the beauty of the stock exchange in my opinion: almost everything works both ways.

Another aspect is the damage itself. What damage exactly? Trading or investing on the stock exchange involves taking certain risks. You can try to regulate all you want, but its those risks which allow people to either make or lose lots of money. Regulating only means postponing the inevitable.

And that's problem number two: If you regulate the amount of trades people can make you're not only blocking possible losses, but also blocking possible profits. Because having the option to purchase many stocks in one go is a good way for a trader / customer to invest and for the company which sells those stock to make some profit out of this.

And it's those profits why most people trade on the stock exchange in the first place.

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Anonymous Coward

@ShelLuser - Re: @InLog

Let's put a (progressive) tax on transactions then and let those HF traders regulate themselves. If they are rich enough to spend money on these gadgets, they should have enough for the taxman too. Taxes are the best way to put a brake on something without using any interdiction.

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Or time to stop bailing out the losers. If you made it perfectly clear that there is no happy ending when your clever algorithm bets the entire bank on the 2:30 at Ascot, this would all be self-regulating (at least in the next generation).

Also, stock markets that didn't allow selected customers to buy themselves into a privileged trading position might suddenly find that sane companies wanted to be listed there, rather than live with an ever-present threat of waking up one morning to find the (real) company has been wiped out has been wiped out by some cheeky rocket scientist on $1m/year.

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Re: @InLog @ ShelLuser

If those profits and losses were borne only by those actively playing, I'd agree with you. However, these greedy, panicky fuckwits affect *my* life, and I do not gamble with my money. I therefore agree with the OP that there needs to be a brake on the system.

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Re: @InLog

The important thing is that jobs get lost when the stock market crashes.

The stock market should be regulated, so that it performs its intended function - making it possible to raise money to build productive things like factories - without other things happening that detract from the successful accomplishment of that function.

Letting stock market speculators make profits off the backs of working people is not an important function of the stock market, so if regulations block that it's no loss.

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"However, these greedy, panicky fuckwits affect *my* life"

Except not. The Parliamentary report into the '08 crash is out -- and hardly a whitewash, since Parliament have been at the front of the queue to complain about evil gambling investment bankers -- and they've concluded that Northern Rock went bust by lending too much money, mainly mortgages, to people who couldn't afford to pay it back, HBOS went bust by lending too much money, mainly mortgages, to people who couldn't afford to pay it back, and RBS went bust by paying too much for ABN Amro and lending too much money, mainly mortgages, to people who couldn't afford to pay it back. It was a retail bank fuck-up; not an investment bank fuck-up. HFT, complex derivatives, naked short selling, and credit default swaps had nowt to do with it -- and this is coming from the people who assured us that the problem was entirely caused by HFT, complex derivatives, naked short selling, and credit default swaps.

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Is there a benefit?

This really isn't my area of expertise so I hope someone on the Reg can help me become better informed - is there any benefit to all this rapid trading? It seems to me that only the winning participants benefit and that there's no way for me to reliably predict who they will be.

So would I care if, say, each traded entity had a price set daily at which trades could be made and which did not change until the next day?

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Boffin

Re: Is there a benefit?

I can't tell whether this is a sarcastic comment or not... The point is to _be_ the fastest so you can _be_ the winning participant. If a company announces lay-off's, it can't be doing very well, so the trick is to catch the news and put in an offer to sell all your shares at a (not so reasonable) price before everyone interested in buying realize that you're now trying to offload something that's not worth what you're asking. I.e. the trick is to offload something worth 2p for £2 before everyone else realizes it's not worth £2. At the end of the day rapid selling only helps you increase the gap between what "everyone else" thinks a stock is worth and what you think it's worth.

Now scale that up - not only do you need to watch the news, but you also watch what other traders are doing, trying to infer meaning from their activity. The big players can really screw up the market simply by deciding to cash in and sell all their shares for _no_ reason, resulting in other algo's figuring that "they must know something we don't" and also selling up - no human intervention, yet the value of the stock falls significantly.

The principle of a free market is that I can buy whatever I want provided I'm willing to pay the price being asked by the _seller_. If you as the exchange enforce a fixed price, you're effectively saying "yes, you own it, but I'm telling you that you can't sell it for more/less than this price". It doesn't make a whole lot of sense. I'm sure you wouldn't like it if ebay told you that your car is only worth £6000 today and therefore that's all you can sell it for.

If this was the case I'd also be out of a job since I work for one of the low-latency market data vendors!

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Re: Is there a benefit?

OK, here's an example. Let's say it's about midday, and the news breaks that Company A is not doing very well -- some layoffs, bad quarterly results, the CEO resigns, whatever. You have a million shares in A, which cost you £1 each and which were worth £1.50 at 09:00. Now, in the light of the news, no-one's going to pay £1.50 for them, but, if the news isn't too bad, and if a buyer reckons the price might rebound, someone might pay £1.10 for them. You might well want to sell at this point; you'd at least have the choice.

Under your suggested system, you're forcing everyone to wait until the next day before buying or selling, as sales simply would not happen at the pre-news price -- you wouldn't spend £1.5M on something worth maybe £1.1M, maybe less, would you? What you're actually doing there is introducing uncertainty and risk into the system: you're denying people the option of offloading risky shares, forcing them to hold on to assets which may be about to plummet in value.

One of the advantages of a stock exchange is that it does in fact set price fluctuation limits. When you hear on the news that some stock chashed and trading in it was suspended, that means that the price dropped so far that it breached the exchange's limits and the exchange therefore disallowed any further trading in that stock. So exchanges allow the price fluctuation that a free market needs while also imposing some reasonable limits on the more extreme fluctuations to give the system a bit of extra stability.

So the benefit for traders is simply that they are free to buy and sell stuff at the price they want to, same as you are, which helps them to avoid risk and catastrophic losses. As for the benefit for the world at large, remember that this entity with a million shares could be your pension fund, or a company with ten thousand employees.

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Devil

Re: Is there a benefit?

I should add...

> you wouldn't spend £1.5M on something worth maybe £1.1M, maybe less, would you?

I'm assuming here that you're not RBS.

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Fascinating article

You have to be impressed by the technological effort put in to make these systems, but you do wonder whether the effort could be better spent than trying to sell virtual stocks to make quick buck(or two million)

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Anonymous Coward

Re: Fascinating article

I work for such a company and whilst it pays well and the work is interesting with new problems to solve all the time in the arms race that is faster execution and better quoting (for us, not you) you cannot help but think "the human race would be far better served if we all stopped fucking around with this bollocks and did something useful". Like others we have physicists (nuclear variety), an actual rocket scientist and numerous maths PhDs. Surely there's a better use for that? However whilst inflation remains uncontrolled and house prices are constantly pumped we all have mouths to feed and roofs to provide thus this will continue.

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Re: Fascinating article

"However whilst inflation remains uncontrolled and house prices are constantly pumped we all have mouths to feed and roofs to provide thus this will continue."

and do you think there is no a correlation that and financial instruments that no one has any control?

The thing that annoys people outside the financial industry is that all the effort only ends up transferring money from one place to another. It does not produce wealth only redistributes it among those who don't really need it. It is akin to betting where you get the horse results 5 minutes before the rest of the suckers.

If half the effort was put into manufacturing real things then maybe the country would not be the financial mess it is now.

Sorry <Rant> over

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Re: Fascinating article

"and do you think there is no a correlation that and financial instruments that no one has any control?"

Please, inflation and house prices have everything to do with the Government - do you honestly believe that if they didn't want the price pumping to occur that they couldn't have stopped it? House prices are pumped by the Government for two reasons - taxation, and wealth affect. Housing is the one area where tax is near impossible to avoid. Stamp duty on transfer, council tax on value, and debt slavery for good measure to keep you under control. The wealth effect is just there to convince you you've all got more money in the pot whilst you are systematically getting shafted by the wealth destruction that is inflation. A little sugar coating if you will. Ever notice how the only people with consistently inflation busting pay rises and pensions are politicians? Sure they'll slow it down for a year or two (and suckle harder on the expenses teat to compensate) to keep the voters appeased but they'll always be well ahead of the curve. Public sector wage inflation during the same period was vote buying by Labour as they pissed the country's wealth away. Benefits rose mightily as well to buy a few more votes. Notice the uproar when you try and lower public sector pay or benefits despite the private sector being hammered? Sense of entitlement anyone?

You can ride along on the banker bandwagon with all the other general public suckers that believe the political spin of "it's all the nasty banker's fault" if you like but I prefer not to live in ignorance. The people in the limelight before the financial world imploded were the expense cheating leeches in the corridors of power. The people that pissed away the money in the good times so that we now have a structural deficit in the bad. You might want to ask yourself whose responsibility it was to regulate your favourite bogeyman? Didn't occur to you that what was happening was fine and dandy by them until it went boom?

Take away every single penny of the nasty bankers debt and the UK still has a massive structural deficit. Know what that means? I'll spell it out for you - we're spending way more than we have, every bloody year. Get rid of the city (err, and the billions in taxes generated incidently), manufacture your heart out all you like but the UK cannot afford the payments it is making whether that be for middle eastern wars, benefits, or the NHS.

Get used to it because the country is long-term f*cked.

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Re: Fascinating article

> The thing that annoys people outside the financial industry is that all the effort only ends up transferring money from one place to another. It does not produce wealth only redistributes it among those who don't really need it.

Yes, this does annoy people. It's not actually true, but it does annoy people.

Every day, the benefits of an efficient market are reflected in the price and availability of everything you buy. It's often quite difficult to explain the link between exchange trading and how well stocked your local supermarket is and why the country never runs out of eggs or lightbulbs, which is why so many people are unaware of its existence, but the link is there. Look at countries that aren't properly involved in exchange trading. Compare the difficulties faced by their populations with ours.

The pricing mechanism creates optimal prices, which in turn maximise trade. By exploiting market discrepancies, arbitrage removes those market discrepancies, giving us more optimal prices sooner. HFT, by speeding up arbitrage, gives us optimal prices even more quickly. The more optimal the prices, the more efficient the entire system by which we produce goods, move them around, and sell them to people who want them. What would happen if some disaster led to the wholesale destruction of the crop of every farmer in Britain? Famine? Of course not. We're lucky enough now to live in a part of the world where such an outcome is unthinkable. And why would the destruction of our food supply not lead to a food shortage? Efficient trade.

If you think trading produces no wealth, ask yourself how these shiny new buildings which are constantly going up in the City are being paid for. It is simply not possible to carry out projects like that on the back of moving some money back and forth: you have to create wealth to spend that much of it.

Sure, crashes happen, but the thing to bear in mind is that the population became generally wealthier from 2000 to 2013, regardless of 2008 and 2010. Indeed, we've had scores of terrible crashes over the last hundred years, yet we still live in a far wealthier world than existed a hundred years ago. The crashes are blips, but the overall net progress of the system is still good.

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Go

Re: Fascinating article

You've pretty much made the case for the transition movement..this is why local currency exchanges exist. Put to one side the middle class hippyness of it, there is a good reason to enable communities to become resilient wherever they are.

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Ah the joys of theory vs reality

It is true that in general the world's population is on average better off now than 100 years ago, yet the divergence between mean and median has increased and the median has moved leftward steadily releative to mean income. Curiously though, the same basal level of poverty is still the start point for that spread. That is, the poorest people to day are precisely as poor as they were a century ago and precisely as well equipped as ever. You need only look at the poor in Indian cities, the "troll" populations lurking under bridges and overpasses in the US, the slums of Rio de Janeiro to verify that the truly poor are in fact not better off now than they have ever been. Dirt poor remains dirt poor and has seen no "relative improvement." What really has changed is the spread between the wealthy and poorest. In the US the "one percent" is largely a product of those "efficient markets." Likewise, the wealth "created" really is not primarily goods. The fractional reserve banking system permits banks to issue money. Not the government - banks. If you worry about inflation look to your bank and the interest it charges vs. the interest it pays you. That spread really is inflationary.

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FAIL

Re: Ah the joys of theory vs reality

Leaving aside the example of people living under bridges in the US (since everyone I've ever known who works with the homeless insists that the root cause is usually mental health, not money), you're talking about people living in slums in undeveloped countries. But here's what I said:

> Look at countries that aren't properly involved in exchange trading. Compare the difficulties faced by their populations with ours.

You seem to think you're contradicting my point, but, as far as I can see, you're making it.

I do have to disagree with your explication of the statistics, though:

> the divergence between mean and median has increased and the median has moved leftward steadily releative to mean income. Curiously though, the same basal level of poverty is still the start point for that spread. That is, the poorest people to day are precisely as poor as they were a century ago and precisely as well equipped as ever.

This is a very long-winded and pessimistic way of spinning "Yes, most people have got wealthier, and the number of people in extreme poverty has decreased."

And "precisely as well equipped as ever"? So, no antibiotics, then? Just as likely to die of cholera or bubonic plague as ever?

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Pint

Re: Fascinating article

Don't fail to realise that the reason there is so much money and brainpower involved in financial markets is that they serve to increase the productivity of practically every human endeavour by helping supply meet demand. If a year's work of a nuclear physicist results in a 1% increase in the world's cereal harvest in order to meet an anticipated future need, then that is time well-spent.

Algorithms and systems only make money when they are correct, and implemented efficiently compared to the competition. High-Frequency Trading is just the next logical step, with the potential to pick up information and transfer it to the market much faster, and to make or lose money at a correspondingly increased rate. Remember, traders only make money if someone else, somewhere, is also having their life made better in some way.

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Radical solutions needed

We need to go back to the root of why we have stock markets. They exist so that companies can raise money from other people for expansion, investment etc. The investor is (hopefully) paid a worthwhile return (dividend) on the investment based on the increased profit of the company. If things go well then, after a period of time, they may be able to sell their share in the company to someone else for more than they paid for it - although of course this doesn't actually benefit the company in any way. Arguably a proportion of any profit in trading shares should go back to the company.

But the whole point of a share market is to allow companies to flourish, not to provide an alternative to roulette, the gee-gees, mugging or visiting sub-post-offices with a shotgun. Share investment should be a long-term business, so there really needs to be a return to a slower system so that these cowboy gamblers are removed from the market. A simple solution is a) a small tax (0.5%?) on every transaction - irrelevant over five or ten years, and b) require that all trading is physical - shareholders must have physical cerificates, in their name, issued by the company, and must be in physical possession of the certificates at the time they sell the shares.

Not that difficult, is it?

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Headmaster

Re: Radical solutions needed

Erm, I was under the impression that the original point of shares was to spread the risk of trading vessels so that the loss of 1 ship wouldn't bankrupt anyone. However equally everyone got a share of the profits when the ship arrived safely. The stock markets were borne out of the desire to get out of a venture if something came up.

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Flame

Re: Radical solutions needed

Yes, what good do these HFT do for society. What good do they do *even if* you accept the need for capitalism. It's just high-tech coin clipping.

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Unhappy

Re: Radical solutions needed

Ooooh, look, a problem. I know! I hjave a universal solution (roll drums): a *new tax* ! That's right, ladies and germs, the tax, this good ole' cure-all, worshipped by English departments and arts majors everywhere, can cure your ills faster than you can spell n-i-n-c-o-m-p-o-o-p.

Taxes aren't a solution, they're a way to compound a problem.

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Anonymous Coward

Re: Taxes aren't a solution, they're a way to compound a problem.

Oh, I dunno. They seem to do a reasonable job of providing education, health care, security, a quite a number of other useful things to our society. Not perfect, perhaps, but on balance not all that bad.

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Stop

Re: Radical solutions needed

While I agree with your point about financial services going serious off piste from it's proper role in a capitalist society, a financial transaction tax (FTT) is not the way to bring things back to sanity. Unless you manage to get full global co-operation, then the trades just switch jurisdictions (see Sweden's attempt at this previously) - proper global support for a FTT is harder to get than global support for other changes that will do the job just as well.

Oh and for the HFT supporters out there screaming 'market liquidity, market liquidity' you're wrong - HFT only increases market liquidity in the times where liquidity is not a problem, it doesn't magically increase liquidity when it is drying up because the same fundamentals apply to HFT as do the 'normal' market.

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Re: Radical solutions needed

Small tax on what exactly? The total value of the transaction? Or just the profit from it? What if the transaction results in a loss? Can a loss be used to offset a gain? Over what time period?

Under the current US tax regime, I think the answer is a bit simpler. Go back to using the time a stock is held to determine it's eligibility for the capital gains tax rate. If it hasn't been held for at least 6 months, it gets taxed as income rather than capital gains.

I also don't see the need to have physical paper for the certificates, and especially don't see the need for the person who owns them to keep them. Many years ago I dabbled in the market, never had a certificate. Lost my shirt of course and haven't been able to get back into at the personal level since. But I held all the stocks I bought for more than 30 days. So that doesn't actually get you where we need to be.

In fact, I'd say right now the biggest problem with the stock market is something they keep selling us as a Good Thing(TM): Mutual funds. Granted the intended idea was a good one. But the way it has actually worked out is horrendous. The volatility of the market isn't just down to HFT, it's also down to too few people trading too many dollars. Even the richest person on the planet doesn't throw around the kind of money a mutual fund trader does.

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Re: Taxes aren't a solution, they're a way to compound a problem.

All right, but apart from the sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system and public health, what have the Romans ever done for us?

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Anonymous Coward

@SysLoll - Re: Radical solutions needed

No taxes -> no revenue -> no services. I can't put it simpler than that, even if it is for you.

Are you trying to tell us we should abolish all taxes and start providing ourselves our own police, justice,fire, medical etc. services ? Care to explain how would you see police, military and justice turning their activity into a for-profit one ?

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Re: @SysLoll - Radical solutions needed @AC 18:27

Please don't feed the libertarian. He'll come back and tell you that law and order isn't actually needed, it can all be dealt with as civil law, with paid-for services. He'll also say that, again, you can pay for the best contract for you for fire (remember the first fire-services (in the UK) were provided by insurance companies, and if you didn't have the right badge on your house, the firemen would let it burn to the ground). The military, equally (the libertarian will say) was run on the basis of mercenaries for far longer than the standing-army system, and that it prevented wars (though a look at the history of Europe between, say, 800 and 1800 proves what bollocks that is).

in the anti-tax libertarian (actually, anarchist) point of view, there is no such thing as a free lunch, and taxation is all a way to keep the weak poor living off the deserving rich , and ... oh, I can't be bothered any more. For an idea of how such a system might work (if you have money), have a look at Heinlein's "The Moon is a Harsh Mistress"

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Anonymous Coward

Time for a Tobin Tax

" A simple solution is a) a small tax (0.5%?) on every transaction "

You mean like a Tobin tax?

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