back to article Why a Robin Hood tax on filthy rich City types is the very LAST thing needed

The lovely thing about this year's Nobel Prize in Economics is that it entirely borks the case for a Robin Hood Tax - a levy on the financial sector's transactions, in other words. Not that the judging panel's decision will stop efforts to implement the tax; everyone's moved beyond intellectual arguments to instead howl in the …

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Do they know what ''science'' means ?

''The 2013 Sveriges Riksbank Prize in Economic Sciences''

Economics is not a science, the closest that it gets is to be a branch of psychology. In spite of what the egg head bean counters want you to think - you can only make vague predictions and forget the notion of rigorous repeatability.

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Re: Do they know what ''science'' means ?

> Economics is not a science, the closest that it gets is to be a branch of psychology.

That's probably true, since economics is tightly bound to the motivations people have for doing things - and it's not always about money. And, like any subject that has to add the suffix "science" (just like countries that call themselves "democratic" or "the people's ... "), almost certainly isn't.

However, that doesn't mean it is irrelevant to how we live and has nothing to contribute. Have a read of some of Tim Harford's books: The Undercover Economist being a good start: not only entertaining but easy reading. And if you want to know why oral sex is becoming so popular, read his second paperback, TLoL.

[ Disclaimer: I am not Tim Harford and he is not me ]

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Headmaster

Credibility: Zero

So, the blogger who gleefully endorsed one of the greatest violations of civil rights in history, PRISM, now celebrates a bunch of narcissistic libertarians winning an award, from the same dubious organisation (founded by an arms dealer dubbed "The Merchant of Death") that awarded a warmonger called Barack Obama a "peace" prize, whilst stigmatising egalitarianism as "theft".

Colour me unimpressed.

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Re: Credibility: Zero

What's that got to do with 'Pedantic grammar nazi alert'? Try the sherlock or black helicopters maybe?

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Robin Hood etc

"Robin Hood tax!" is less of a serious strategy, more of an anguished wail from the UK citizenry still denied justice 5 years after the economic crash.

Instead of sackings and imprisonments, it has been business as usual, the same faces still in control, and already repeating their mistakes. Until justice is obtained, and the moral hazard is erased, folks are just not that interested in banks distracting us with pretendy prizes or discussing theories.

News just in - this week's banking scandal - hard sell of so-called "interest rate swaps", http://www.bbc.co.uk/news/business-24508664". Panarama last night...

(I am not disparaging the chaps who won the prize.)

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Re: Credibility: Zero

And it shows that you haven't read the article on PRISM beyond the headline or understood the point.

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Re: Robin Hood etc

@ Jim 59

For justice it would be the labour gov at the time in charge of regulating the banks who need to be dealt with. There are a number of people who did illegal activities and some were brought to justice. But when everything crashed there was nobody appointed under labour to blame. Nobody was in any control.

Where was the body to say "oops, my bad"? Where is the body that then said we will put it right? Where is the body that chased down the problems and arrested/turn in the criminals? It didnt exist.

When there is no law there is lawlessness. There was no law. Nobody was enforcing and nobody in charge. First to justice should be labour. Then each cretin who broke the law starting at the top and working down.

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Re: Credibility: Zero

http://www.bbc.co.uk/news/business-24508664

This really bugs me off. But Panorama is being so bent here - down to even using pictures of little children playing as they are talking about the treacherous bankers.

However, the interest rate swap is a hedge. That means that if the interest rate in the market goes up, they pay more interest on the loan but the bank pays them the difference on the swap, if the market is going down - the reverse happens: they pay less interest on the loan but have to pay extra to the bank on the swap.

In either case - they get, in total, the interest rate which they have fixed when they've done the swap.

Yes, the bank may not have explained clearly to them how it was supposed to work but they did not lose anything (apart from the additional fees and the small extra margin built into the swap) - it was an opportunity cost. Had the market gone up, they would have been proudly bragging about how clever they were to buy the swap from the bank in the first place.

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Anonymous Coward

Re: Credibility: Zero

I vaguely agree with your sentiment, but must point out that, as mentioned in the article, the Economics Nobel is institutionally distinct from the Norwegian Nobel Committee (for the Peace Prize) and the other (Swedish) Nobel Committees for the sciences.

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Re: Robin Hood etc

The persons who I lay the most blame for the financial crisis are Barney Frank and Chris Dodd. The two Democrat Senators who were in charge of the Senate banking committee. They had a goal of making houses affordable to all, even people who were too irresponsible to be able to buy a house. This caused too much cheap money to go chasing too few houses causing a real estate boom and bust.

The irresponsible people were all trying to "flip" a house, which is the equivalent of taking the rent money to Vegas and double it. But then that is what irresponsible people do.

Playing Robin Hood is what caused the financial crisis of 2008. Playing Robin Hood again will . . . I keep doing the same thing and I keep getting the same results.

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Re: Do they know what ''science'' means ?

Ah, but Alain, didn't you see that word "hypothesis"? Hypotheses are 50% of all science. So economics is science... if you ignore that other 50% that we call "evidence".

So Tim, how can you "bork" or "put the kibosh" on stuff with unproven assertions, which is all an untestable hypothesis ever is?

And what about the rise in microsecond-scale trades we're seeing? Preprogrammed insider information or very reactive algorithms? It doesn't matter -- either way, you can hardly argue that this is an open and equitable system.

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Big Brother

Re: "haven't read the article"

Well, take this juicy morsel, for example:

"This is the first principle of even having a State in the first place: to make sure that the populace is protected from the depredations of the foreigners who would do them harm."

Except the thing that's doing the most harm to the American populace is not some foreign bogeyman, it's their own corporate tyrants and their political lackeys.

Also, surely the point of a (democratic) state is to enact the will of the people, not mindlessly attack anything that's not American. It should be about welfare, not warfare.

Oh wait, I forgot, America isn't a democracy.

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Alien

Re: choice of icon

Well it was the closest visual representation I could find to "I question the author's integrity".

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Headmaster

Re: institutionally distinct

OK, substitute "from" with "associated with".

Although actually the worst thing about this award is the fact that it exists at all, regardless of who issues it. It's like issuing a prize to those who devise the most effective method of enabling the rich to screw the poor. They should call it the "Bernie Madoff" award.

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Re: Robin Hood etc @codejunkey

and you also forgot

Where was the process that brought Clinto to book for *persuading* Fany Mae & Freddy Mac into making loans to people who were NOT qualified to borrow a cent; never mind the cost of a house.

And the *regulators* who then allowed garbage mortgages to be wrapped up with good risk ?

The crash started when a numbskull who believed he knew better than everone else & insisted that percieved *racism* rather than proper econmics was the reason poor (non-white) people in the States couldn't get mortgages. The crash simpley prooved just how wrong Clinton (and like minded useful idiots) was about the reason poor people (of every colour) couldn't get mortgages. Economics may be a psuedo science - but I'll take it over wishfull thinking any day of the week.

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codejunky Re: Robin Hood etc

@ codejunky

You are pretty funny and don't get me wrong, I probably hate the labour party more than you do ... but blaming them for the financial crisis that started out with salesmen selling houses in the US to people who could not afford them in great numbers and banks trading those loans on the stock market is not very fair. Are you Nigel Farage ? Certainly sounds like it, absolutely clueless.

The main problem we face today is the amount of wealth that is transferred from the real economy into the virtual economy (stock markets) and that we never see again because its fruit end up in some tax haven.

The point of the Robin Hood tax is to prevent traders from speculating on some stuff, such as currencies. Look what speculation did to the UK (on currency in the 90's) or Greece and Spain more recently (on debt) ...

You cannot legally charge the CEO's or the traders in person, they are just doing their job and you cannot charge the employer, because it is a bank ... fine a bank and we pay the fine.

Sadly, banks rule the world and you MUST have a bank account.

Lessons?

1. Never work for a quoted company, ever.

2. Never invest in the virtual economy.

3. Ovoid overdrafts and loans at all costs.

Those who do 1 and/or 2 are criminals.

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Re: codejunky Robin Hood etc

"The main problem we face today is the amount of wealth that is transferred from the real economy into the virtual economy (stock markets) and that we never see again because its fruit end up in some tax haven."

Just because you don't understand how something works does not mean that it's "virtual".

And, seriously, claiming that somehow the Greek and Spanish problems were caused by "speculation" is just as daft as saying that rain is caused by open umbrellas.

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Re: Do they know what ''science'' means ?

There are plenty of supposedly hard sciences that are like that. Astrophysics and cosmology. Any biology involving organisms that won't fit in a lab. Climatology. As pointed out in the article, if you're going to accept any of those as having some scientific basis then you need to accept economics too.

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Re: Do they know what ''science'' means ?

There are plenty of supposedly hard sciences that are like that. Astrophysics and cosmology.

More generally, we recognize that direct experimentation is applicable to some sciences, but is not generally available to others; and that it is not the sole empirical method. Empirical sciences that do not accommodate direct experimentation are built on rigorous and methodologically-sound1 observation, on formal models (mathematics), and lately on massive computation.2

Economics can be built on those three things. As a science, its two remaining major drawbacks are insufficient engagement with the irrationality of its actors,3 and its lack of predictive power. That last ought to be a caution to anyone seeking to support a claim about policy using economics, but - as we see in this article - it rarely is.

1In particular, methodologies that are designed to reduce bias and subjective evaluation. There are a number of techniques for promoting those features even when experiments can't be conducted under controlled conditions.

2This last, Ken Wilson's "third leg" of science, is still controversial in some circles, but the considerable successes of computational physics, chemistry, biology, etc over the past few decades is ample evidence that it's both valid and capable of producing results that are not available through other means.

3Behavioral economics is working on addressing that, but there's a very long way to go.

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Anonymous Coward

Re: Do they know what ''science'' means ?

"Behavioral economics is working on addressing that, but there's a very long way to go"

And therein lies the problem: "working" and "long way to go".

Behavioral economics is a relatively new study field of economics yet any rational person would look at the macroeconomic models and say "But what if Actor [a] does not act as you predict?!". The problem is that economists theorized in a vacuum, lacking the input of the human condition in the equations, for a property that acted based upon the input of...the human condition.

It was arrogant and, we now know, shortsighted. The economists (now, self-admittedly) patted themselves on the back at their brilliance of mapping market actions based on stimulus input, all the while removing human variability from those inputs.

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Re: Robin Hood etc @codejunkey

Some people observed REAL raciam and classism in the housing system. For example, the Atlanta Journal-Constitution found in 1992 that when white and black people were given the exact same financial records, the blacks who showed up at the loan interviews were 20% less likely than the whites to get the loan. Some people noticed this and tried to take action. The fact that their actions may have been misguided does not disprove their observations.

And I'm not really even ready to give that ground. That banks engaged in what is called on the tech world "embrace, extend, extinguish." The gov extend concessions to the banks to offset the risk of loaning to the unproven. The banks "embraced" these concessions because they were cold hard cash. They then 'extended' these concessions by marketing to those who would never have been denied loans (they would have never applied on their own) and creating more insurance for themselves through MBS'. They then 'extinguished' the push for a more equitable system by robbing the people blind through insider bailouts and blaming the issue on the poor people (who are still poor, or poorer) and distracting the public from those who made billions on the poor decisions of the financially uneducated that were aggravated by professional salesman pitching can't-lose financial bets that the marks didn’t understand.

I'm and salesman (a waiter, actually). I was poor during the bubble. I recognized a scam when I saw it, but many people I know who are financially better off than me were taken. My father, who has been at least upper middle class since I was born, offered to give me the down-payment and to assume all the risk for me if I took an ARM mortgage in 2005. He was sure, on the advice of his financial advisors, etc, that owning property was the key to personal wealth, and wanted that for me. He was fooled, and I wasn't.

To be clear, my father is much smarter and capable of acquiring income than I am. The reason he was fooled and I wasn't was I DON'T TRUST BANKERS AND THEIR OBFUSCATED PSEUDO-SCIENCE OF ECONOMICS. They were trying to loan poor people (me) money. And since I know that banks are dyed-in-the-wool predators, despite what TV, the gov and bloggers tell me, I refused, and my dad is not on the hook for an upside down mortgage. My hypothesis was tested and shown to be correct. That's science, not the hindsight wisdom of 'economics' as it is practiced by our banking institutions and their Central Banking allies.

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Re: Do they know what ''science'' means ?

Since I'm studying the damn things, I'll stick my our in and say econometrics is a science, and economics is the creation of models based on that science.

It's often the lack of willingness to change those models that seem to be the problem. A frequent example is about how rational a decision is, when faced with choosing a short term outcome or a greater long term outcome. In theory, the rational choice is the long term payoff, so everyone will do that. In practise, most people prefer short term rewards. If you start plugging in the bias towards immediate results and neglecting long term rewards, then some models collapse in a race to the bottom.

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Re: Robin Hood etc - @ElectrRook

a lot of Republans were responsible for the housing bubble too.

now that we've eliminated each other's ic's lets talk.

the deregulation of much of the financial industry was done on the Republican's watch. they also fought tooth-and-nail to kill and/or cripple the consumer protections so admirably fought for by Elizabeth Warren (now The Honorable Elizabeth Warren, senior Senator from Massachusetts). both actions contributed to the buying spree in housing that was doomed to fail when banks stopped lending based on ability to repay, that a good regulatory system should have stopped, and consumers weren't given good information during the loan process, again a failure to regulate loan documents and insure that both parties know what the terms are.

include the lack of regulation that allowed the banks to create those lovely lumped-together mortgage packages or the lack of oversight that allowed them to be so highly rated and you have the recipe for the disaster that ensued.

Democratic Senators Frank and Dodd may share some of the blame but there is more than enough to spread around with a shovel.

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Re: codejunky Robin Hood etc

@ c:\boot.ini

"You are pretty funny and don't get me wrong, I probably hate the labour party more than you do ... but blaming them for the financial crisis that started out with salesmen selling houses in the US to people who could not afford them in great numbers and banks trading those loans on the stock market is not very fair."

I dont hate the labour party, the party is made up of a flow of people joining and leaving, it is the last government (blair/brown) I blame, some of which still run the party. It was the US who tanked first but the last gov was dragging us to a crash. The huge financial gap left to us wasnt the US's doing, it was already there. People only noticed when labour couldnt borrow to keep the bribes flowing. As they said- we need cuts that would make thatchers eyes water. The same would have happened had the euro sank (as it has) or we carried on regardless.

"The main problem we face today is the amount of wealth that is transferred from the real economy into the virtual economy (stock markets) and that we never see again because its fruit end up in some tax haven."

Really? Looking just at the UK is this going to make up for voters unwilling to part with their bribes from the previous governments (plural)? Is that going to fix the damage to the economy from green tax and bad energy policy? Will that fix the immigration problem where our borders cannot cope or hope to do their job properly?

There is a simple problem. People want the gov to do what it cannot do-

>People want jobs, but the gov cannot make jobs. Every job in the public sector costs at least that job in the private sector but also costs collective tax to pay for that job (which actually costs more jobs).

>People wont accept failure in the public sector and will complain the gov dont care if they dont do something, so more regulation and time wasting is applied to problems regardless of it fixing any problems.

>But people dont want to pay so much tax, but the gov has to pay all its workers including for the time wasted at the whim of the voter.

So govs borrow too much, make bad decisions and all for winning votes (because that is who we vote for). The global economy collapsed and we could see who was overspending, the others were fine. So much so that germany props up the eurozone. Without the eurozone it would be stronger. The UK is skint and living on borrowed money, as it was through the boom!!!

If this country cannot afford to support itself throughout a boom it cannot possibly support itself through a bust. As a country we are very bad at our finances. There are plenty people exploiting that but it begins at the top and needs to be fixed.

Blaming bankers is weak and lazy. The bankers do what they are allowed and brown was very happy with them. He made no attempt to hide it.

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Surely, people can lie...

or pretend they know something about the future value of an asset?

The point being, the people who stand no change of having insider information will still act when they see other buy, or sell. Those without info will assume that others have the info, and act in the same way, but a bit later.

Which means that those without info can be manipulated.

Which must mean that markets cannot be efficient.

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Re: Surely, people can lie...

For the first part Google "the five stages of a bubble". What the author is implying though is that you need to be able to speculate, to take the other side and say "I think that's overpriced shit" and to go short otherwise the market is absent crucial pricing pressure on the other side. Bubbles are human nature though.

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Re: Surely, people can lie...

"Surely, people can lie... or pretend they know something about the future value of an asset?"

Yes, it's happening all the time and it's known as "pump and dump". But FTT is NOT how you solve that problem.

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Re: Surely, people can lie...

>Which must mean that markets cannot be efficient.

Or alternatively, that gambling on what other people believe about the future is pure fuckwittery, and one of the most idiotic of all possible ways to make important decisions about resource allocation.

If you want to play on the gee gees or waste your money on roulette, be my guest. But get the fuck out of my economy so I'm not the one who's supposed to pay *your* gambling debts when your stupidity blows up in *your* face.

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Re: Surely, people can lie...

The point that there needs to be a 'short' option on housing is well made, and clear, but it only shows that more speculation in this particular area would have helped the economy. It doesn't follow that all speculation is always useful, nor does it follow that a tax on financial transactions is harmful to the economy in general.

FTT creates a slight 'drag' in some market sectors, it does not destroy those sectors entirely (as a lack of options to short housing did). If we had a mechanism for shorting 'bubbly' assets plus an FTT we would still have a better market overall than current.

Also one more lesson from the sub-prime clusterf**k is that the more complexity is built in FTs the less well the market functions. Why were so many banks buying the A rated credit default swaps that were completely worthless? There was an active market for them, but their price did not go down to their true value ie zero.

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Anonymous Coward

Re: "Which must mean that markets cannot be efficient."

Thank you. Finally, logic brought into the eyes of the believers of 'freshwater' economics.

An unregulated market does NOT work. We have 19th century history as proof of this: constant, painful swings of boom and [massive] busts. The question is "Why?" and the answers lie in directions that free market neo-conservatives simply do not want to hear.

Regulations are not created out of the ether. No human says, in front of Parliament or Congress:

"Some time in the future the derivatives market will decide to repackage debts into marketable tranches - the CDO - and we must create a regulatory structure to deal with this potential idea."

This is an impossibility, no human can foresee the future. So regulations - laws - are (over 90%?) created after the fact; laws are mostly created to prevent a situation from reoccurring by establishing acceptable behaviors in an attempt to correct past mistakes.

Knowing this, fully free-market economies do not work because the belief that 'the market will self-correct and punish poor behavior' only happens after the damage to the markets has been done - the fear of penalty is reduced to awaiting the discovery of the market reaction from the results of the action, rather than discovering the action itself. That may seem to be a minor difference but the psychological effect is enormous: the former allows criminals a greater expectation of "getting away with it" because you are examining a more complex system to look for clues...if you are even looking for them in the first place.

Enron, Tyco, HSBC, Barclay's, etc etc etc prove this theory: when operating at a systemic level with lax oversight, the white collar criminal has a great impetus to actions of greed due to the expectation of their misdeeds going unnoticed, as they expect the mass, inertia and complexity of the markets to hide their crimes.

In short, the "free market" movement seems to always discount the factor of HUMAN GREED into their equations - they always forward an agenda of people acting towards each other in perfect harmony, with enlightened interests and self-interest, all working together to advance their wealth. Too bad they live in a fantasy world (then claim that liberals do!) - there are many humans out there who will gladly take advantage of any sliver of opportunity given them, if it means money in their pocket, and the rest of society will pay (sometimes dearly) for their actions. In a non-perfect world we must have regulations to (hopefully) push people to act in socially-acceptable ways - we can hope one day that they will no longer be necessary, but that day is not coming very soon.

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Re: "Which must mean that markets cannot be efficient."

There is only one ethical, moral and reasonable case for existence of market regulation - to make sure that everyone obeys the same set of rules, has equal (proportionate) access and that no single participant can manipulate the market by non-market means or by his dominant position. One may say, there is also a related purpose for the regulation to protect unwary from committing blunders.

However, any regulation that specifically tries to modify the operation of markets to achieve some social or political goal is in itself a manipulation. It is always short-termist, causes unforeseen consequences and leads to politicians attempting to fix the problems it creates by more knee-jerk, short-termist patchwork of regulation. It is a vicious circle.

Unfortunately, whenever the subject of market regulation enters public discussion it *always* becomes dominated by the manipulative portion, the real purpose of regulation is forgotten.

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Anonymous Coward

Re: "Which must mean that markets cannot be efficient."

Sheer bullshit, you make one startling and always false assumption, that the regulation of a market is done in good faith and improves the results of that market. Provably false, the white collar criminal as you describe them, are no match for the authority criminals who regulate in their own self interest.

In short, the "regulation" movement always seems to discount the factor of HUMAN GREED in their reckonings. They assume that regulators act in perfect knowledge and for the general good. Too bad they live in a fantasy world (and then claim that those who believe in free markets do). There are indeed many humans who will take advantage of any sliver of opportunity given them if it means money in their (and their special interest partners) and/or power in thir pocket. And although they will very loudly protest that they do it for others, the public in general pays (sometimes very dearly and with their lives) for their actions. In a non-perfect world, the fewer regulators we have the better, as they never act in socially acceptable ways, instead they warp the meaning of "socially acceptable" into being "bash those who would challenge our power and domination". We may never reach fully free markets, but the closer we get the more chance that we will be rid of those parasites.

And remember, a market isn't a "thing" so much as it is an assemblage of those who participate; by pushing fro free markets, people are actually pushing to free those who participate in them. And that means you and everyone in the world who is part of the market.

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Re: "Which must mean that markets cannot be efficient."

This :

"There is only one ethical, moral and reasonable case for existence of market regulation - to make sure that everyone obeys the same set of rules, has equal (proportionate) access and that no single participant can manipulate the market by non-market means or by his dominant position. "

is a ringing endorsement of a FTT on automated transactions

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Re: "Which must mean that markets cannot be efficient."

"is a ringing endorsement of a FTT on automated transactions"

The FTT is supposed to apply to every transaction, automated or not.

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@Vladimir

You are right, the specific FTT being proposed by the EU is on all transactions, but the concept of FTT in general can be tweaked to hit the sweet spot - tax only those transactions that do not have an added value to the economy.

The articles' author (and, I infer from your posts also yourself - please correct me if I'm wrong) is arguing that any transaction whatever will add value to the economy by adding information into the market, so ANY FTT on ANY transaction is inherently wrong.

My view is that all financial systems are built on 2 core concepts. One is allocation of capital (lending / borrowing part) and the other is sharing risks of private enterprise (companies issuing shares) which then distribute their rewards as dividends. All the rest of trading in already-issued shares, currency and commodity markets and related options, shorts etc, while they DO serve a useful purpose in hedging risk, can be and very frequently are used as speculative tools*.

If these transactions are taxed at a very low level (even as low as 1-10bp), businesses will not stop hedging their risk, but speculators who see their profits slashed will speculate less. It DOES increase businesses' costs (very marginally), but in doing so it provides a more stable environment for doing business with less boom-bust. Banks with big speculative trading desks and those working with zillions of transactions at tiny margins will lose out, but the majority of the economy will benefit.**

*Key point, auto-bots are not used by businesses to hedge their risk and have a more stable outlook, they are used only by big financial services firms purely for the purpose of speculation.

** Just check business growth rates in the 50s-80s when finance was more tightly regulated, and compare how growth rates change as financial services are deregulated in 90s and 00s. Financial Services firms' growth rate far outstrips both the growth rate of other businesses AND the total growth, which means that financial services didn't grow by boosting other business, it grew at the expense of other more productive businesses. Curiously (or not) in parallel with this trend, the rich have been getting richer while the earnings and quality of life of the lower and middle class has flattened out.

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Anonymous Coward

@AC 19:39, Re: "Which must mean that markets cannot be efficient."

"Sheer bullshit, you make one startling and always false assumption, that the regulation of a market is done in good faith and improves the results of that market. Provably false, the white collar criminal as you describe them, are no match for the authority criminals who regulate in their own self interest."

I'm calling your "bullshit" as bullshit.

Sure, regulation is imperfect but I DARE you to prove that a system with little to lax regulation as EVER worked for the vast majority of people, to create a stable economic environment and sound fiscal policy.

Go ahead. I DARE you. Find the majority of known and respected economists that support the lax oversight theory as plausible and workable in the real world, especially from the [smaller] group of economists left after the housing market collapse that were not humiliated and discounted because of their [failed] belief in said lax oversight.

Wake up. You are living in the past, listening to self-serving talking heads and believing their Kool-Aide while not checking out reality for yourself. Freshwater, laissez faire economics has been discredited and its influence in economic policy greatly discounted. The IMF and the World Bank themselves moved on from hard-core Chicago school of economic thought, especially after the numerous failures in South America and the refusal of several African nations to adhere to the Washington Consensus policies.

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Re: @Vladimir

"All the rest of trading in already-issued shares, currency and commodity markets and related options, shorts etc, while they DO serve a useful purpose in hedging risk, can be and very frequently are used as speculative tools*."

James, you start with a presumption that speculation is in itself undesirable and does not add value to the economy. I disagree strongly.

Almost all economic transactions are speculative. A baker buying flour for his bakery speculates that the demand for bread will sustain the prices high enough for him to make a profit. Investor buying shares in a company speculates that its value will increase over the term of the investment (no matter if he plans to keep the shares for a few seconds or for 20 years).

The only non-speculative (in terms of price risk) transactions are those that reduce your risk (i.e. hedging or liquidation) or those that exploit inefficiencies in the market(s) (i.e. arbitrage). I disregard corruption here, as it is a special case.

Whether a transaction increases your risk (i.e. is speculative) or decreases it (i.e. is a hedge or a liquidation) cannot be determined from looking at that transaction alone. You have to examine the full risk position of the participants. In most cases one side to a transaction will be speculative, the other - a hedge or a liquidation.

The market views of end-buyers and producers will always tend to diverge and it is (one of) the roles of the speculators to bridge the bid/offer spread.

Now, high-frequency trading. I have not yet formed a definite opinion for myself whether its benefits outweigh the drawbacks but I tend to think that they do. The purpose of HFT is determined by its particular algorithm but most will be involved with arbitrage - i.e. exploiting small inefficiencies and imperfections in the market to make almost risk-free returns. There is nothing harmful in that. In fact, this is a vital function because "exploiting" here means "eliminating" these inefficiencies + they create liquidity for other participants.

But this is why HFT is high volume and fast - to take advantage of small imbalances, existing for a short period of time. If you want to speculate - you would hold your position over a longer period, taking risk and then waiting to be proven either right or wrong.

There is a possibility that HFT may try to manipulate the market by artificially distorting one market to momentarily create a spread to exploit but that normally should be impossible because the trade will work against itself (i.e. making buying more expensive and selling cheaper). This can only work, in theory, if you have a leveraged position, say, in OTC market - but OTC markets are not suitable for HFT, so, there...

I have not seen many problems caused by "run-away" HFT algorithms so far. In fact, markets seem to shrug off occasional glitch much quicker and easier than in the old times. The day-traders are the ones that seem to be affected the most by extremely short-term volatility as they are forced to either set the stops wider, which increases the risk, or tolerate them being broken more often, which kills their efficiency.

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Re: @AC 19:39, "Which must mean that markets cannot be efficient."

Well, I will call this BS as BS as well. In addition, I will call anything that tries to call me BS is BS as well because I am calling MYSELF BS, and you can't call something BS if it's ALREADY BS, can you? (Joke ends).

But seriously, there's a point to this. While it is true that unregulated markets inevitably lead to corruption (the sharpest image in my mind is the American Guilded Age of the late 19th century), the problem is that, like the greedy investors, regulators are people, too. And unlike the investors, they're in a position of power. Which makes them MORE prone to corruption. IOW, you shift the focus of the corruption from the investor to the regulator. Sure, regulations are all fine and dandy when they first arist, but they're eventually tainted over the years. Look at what's happening with markets today. Everywhere you look, more holes than a wheel of Emmentaler. Because regulators get corrupted and insert the loopholes one at a time in a perverted form of "regulatory creep".

What your back and forth demonstrates is that BOTH sides can be corrupted by greed and that greed is basically going to try to ruin anything society. And the worst part is, greed is inherent to all of us. It's a survival instinct (Thugg wants to get everything he needs to survive, and if it means Ooga doesn't make it, even better). Community usually only works when there's a common threat (that's why wars tend to mobilize people--they present a common threat), but when the threat's over, we turn to the threat within.

I'm perhaps oversimplifying things a lot, but I think my thought process explains why you're both correct. In essense, we can't play fair because, deep down, we DON'T WANT to play fair. It's not the greedy investor or the greedy regulator but the greedy HUMAN. And that makes the whole issue of the rules a "hard" moral problem, because solving it also involves convincing OURSELVES not to cheat.

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Re: @Vladimir

"There is a possibility that HFT may try to manipulate the market by artificially distorting one market to momentarily create a spread to exploit but that normally should be impossible because the trade will work against itself (i.e. making buying more expensive and selling cheaper). This can only work, in theory, if you have a leveraged position, say, in OTC market - but OTC markets are not suitable for HFT, so, there...

I have not seen many problems caused by "run-away" HFT algorithms so far. In fact, markets seem to shrug off occasional glitch much quicker and easier than in the old times. The day-traders are the ones that seem to be affected the most by extremely short-term volatility as they are forced to either set the stops wider, which increases the risk, or tolerate them being broken more often, which kills their efficiency."

Didn't we just have a "flash crash" recently? It's a sign of volatility, and the spike in volatility we saw can be scary.

The problem is that while the HFT program is trying to seek out these minute differences, so are many other HFT programs, ALL of them trying to be the one to cash in. It's like a little paper bag with only one sweet left in it when ten people happen upon it all at once. Everyone thrusts their hand into the bag at once because they all act at once. Similarly here, the HFT programs can all act at once, creating a spike. Meanwhile, the transactions take time to clear (because of the speed of light if nothing else), so there's a delay between actually making the transaction and getting the result. WITHIN that time period, any number of HFTs could be making the same move, adding to the mess like how fog hides the 20-car pileup and turns it into a 50-car one.

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Re: @Vladimir

Yes there was that. It caused quite a furore among some politicians. Not much more than that, though.

An exchange system crash or a glitch is a more dangerous event and these are happening much more frequently than any HFT-induced "crashes" like the one you mentioned.

And humans (usually drunk) have been causing such things from time to time since when the first market appeared. Here is one of the latest examples I remember very well:

Oil_futures_drunk-trading_incident

No need for a fancy algo - take a broker, give him high-level login credentials for your trading system, get him totally pissed, feel the pain.

Markets are resilient, they recover. Next time (if you survive), avoid doing the same trade or avoid hiring the same guy or stop using a particular algorithm.

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Paris Hilton

What does automated trading add?

"This is as true of my buying some Royal Mail shares as it is of high-frequency trading, algobots, futures, options and all the rest. It is the very fact that people are trading on their knowledge and opinions..."

Algobots != People with knowledge and opinions, so how can they add or improve information?

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Re: What does automated trading add?

Algobots are not a self-aware SkyNet, they are created by people with knowledge and opinions, and act upon information distilled from market actions of people with knowledge and opinions. That may include past history (an statistical or other analysis thereof). An algo strategy says, in one way or another, do this or that when such and such condition occurs. This is a coded expression of the algo's creators' opinions regarding the right actions given the information. The algos themselves (or their creators, if you insist) are market participants, and their behaviour can therefore also be observed, taken into account, and exploited.

Now, even a self-aware SkyNet would add information if it traded once you think about it. It may be a source of more useful information than the average human, actually.

Note that in no case a trader's (human or robotic - each category is better at some things and worse at some other things) actions should be assumed to be based on complete or correct information, or on valid opinions. Regardless, the actions carry information that can be exploited. Contrarians are rare, and, as Tim states, sometimes they don't even have instruments to act upon their opinions, whether correct or not, preventing the information from being disseminated and observed. There were a few contrarians (e.g., Mike Burry) who effectively shorted the American real estate market and made a bundle during the crisis. Their opinions and their analyses of the available information were correct, but they had real trouble finding a way to trade on their opinions. [One expects a contrarian in an efficient liquid market to have no problem finding someone to take the other side of the trade.] In the end, they used the much maligned credit derivatives to engineer their trades. If there were more and easier opportunities to short maybe the "bubble" would deflate much sooner (enough people would notice that some are shorting and would start scratching their heads) and with less drastic consequences.

More generally, making trading - acting on the information and opinions - in the market easier is beneficial. Much of the existing regulation is precisely about that. But not all. In particular, taxing transactions makes trading more difficult, just like prohibiting certain means of trading (prohibitions of shorts were common enough in recent years, meaning you were free to provide information to the market by acting on your opinions as long as those opinions were positive...). I think this is what Tim is saying, essentially, though I absolutely do not presume to be his spokesperson or his interpreter.

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Re: What does automated trading add?

"More generally, making trading - acting on the information and opinions - in the market easier is beneficial. Much of the existing regulation is precisely about that. But not all. In particular, taxing transactions makes trading more difficult, just like prohibiting certain means of trading (prohibitions of shorts were common enough in recent years, meaning you were free to provide information to the market by acting on your opinions as long as those opinions were positive...). I think this is what Tim is saying, essentially, though I absolutely do not presume to be his spokesperson or his interpreter."

But at the same time, it's noted that trading should not be TOO easy. This is especially true with high-frequency traders who act so quickly the human mind cannot keep up. The end result is feedback loops leading to chaotic market swings. The market needs to be able to move, yes, but if it moves TOO much it'll overshoot, and this can be trouble. Think of the market swing like a bungee cord. You don't want it too tight that it jerks you hard and early, but you also don't want it too slack that you hit the ground before the rebound kicks in. Everything in moderation.

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Re: What does automated trading add?

Automated trading allows, among other things, people to buy or sell large amounts of shares at the most efficient prices by spreading trades throughout the day and placing most of them when the volume would be least noticed. It also allows shares to be bought as soon as a pre-chosen price is hit maximising the number bought/sold at that price.

Basically, if I have an automated trading tool it allows me to hide my knowledge about demand/supply of a share from the market as a whole. This is generally beneficial because it allows the share price to reflect the fundamentals of the underlying assets and dividend streams rather than knowledge about what some person is doing. c.f. Gordon Brown (economic genius) informing the markets that he would be selling billions of dollars worth of gold a day before he actually did it, artificially depressing the market price and costing the UK billions of pounds.

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Re: What does automated trading add?

HFT is *not* easy - it is damned hard, actually, requires huge investment in capital, technology, logistics, and skills (for uncertain returns). I have no idea what your assertion that HFT (and you don't even qualify) results in "feedback loops" and/or "bungee cord swings" is based upon, it does not even sound plausible (given that HFT typically gets in and out of a small position very very quickly), but let us not go into a debate whether it is its beneficial or detrimental side that is more important - it is completely irrelevant to the topic under discussion. To return to the relevant part, whatever an HFT algo does its existence is detectable, hence provides information, hence can be used, which is all that is being discussed. It's just a trader whose trading exhibits particular characteristics. Note that traders already pay transaction fees (as distinguished from transaction taxes) an those limit their activity very significantly.

And HFT is a very small subset of algorithmic trading, don't interchange the two.

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Re: What does automated trading add?

Two words: Flash Crash.

There was a swing in the market so alarming that anyone who would've noticed it would've set off alarm bells. Funny thing was, it was over so darn fast that no one really noticed it until AFTER THE FACT. Since it happened too fast for humans to even know it happened, that reduces it to algorithmic trading, and the speed of the activity basically leaves only HFTs as the possible reason.

An analysis later confirmed that what happened were a few HFT programs reacting to each other much like sharks in a feeding frenzy: one sells, another sees this and sells, a third sees them and sells, the first sees everyone else and keeps selling, etc. They reacted against each other, creating the "feedback loop" I mentioned, and since they're designed to be very fast, it all cascaded...and then rebounded, too quickly for anyone to notice while it was going on.

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Re: What does automated trading add?

Yes, in a jittery market, a large player panicked and triggered the sell-off (not HFT), which slurped up all existing liquidity and confused some algos into a futile frenzy among themselves (HFT). Then the exchange's (CME) fault protection kicked in and stopped trading for 5 seconds which brought the algos to their "senses" and the market recovered.

As the result, some stupidity of the algos was highlighted (and presumably have since been dealt with) and another exchange's (NYSE, not CME where the initial sell off happened and fault-protection was triggered) systems inadequacies have been identified and, presumably, have since been dealt with.

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It does not follow that because some undesirable things result from a tax, the tax is therefore wrong. If such a 'Robin Hood Tax' was created, what would be the benefits in terms of revenue raised, and what would be the costs in terms of economic activity that doesn't happen?

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I have a related question

What are the costs and benefits of putting sand into the engine oil as a way of slowing a car down?

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