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Flash Crash Panel Recommends Financial Transaction Tax

It would have been easy to miss this the past few days, given everything going on. But are you aware that a panel of experts basically said regulators should consider a financial transaction tax, as the only way to stop another “flash crash” caused in part by high-frequency trading?

Regulators should stem the growing tide of anonymous stock-trading and consider imposing fees on high-frequency traders, said a panel of experts advising how to avoid another “flash crash.”

The panel’s 14 recommendations for U.S. securities and futures regulators contained far-reaching ideas to overhaul the high-speed electronic market […]

U.S. regulators were cautious about some of the boldest recommendations, including new fee structures to encourage liquidity and discourage high numbers of order cancellations.

“I do not know where we as a commission would come down on fees,” Securities and Exchange Commission Chairman Mary Schapiro told reporters after meeting with the panel.

That’s basically a “no” from Mary Schapiro, and the rest of the article discusses the other possibilities for regulators. But they breeze by what would clearly by the corrective. A financial transaction tax could be set low enough, at fractions of a penny per trade, that it would not materially impact pretty much all ordinary investors. But it would discourage the kind of high frequency trading that leads to stocks or the entire market moving up or down rapidly without any news. As an added bonus, it would raise a lot of money that could be channeled from unproductive activity like gambling in the Wall Street casino to productive activity like building a rail car tunnel or keeping an at-risk youth out of prison.

The other options, like limit-up/limit-down prices, circuit breakers, and ending anonymous trading, are fine as far as it goes, but it puts tremendous pressure on the underfunded SEC and the CFTC. This is a salient example:

The changes would require the SEC and fellow regulator, the Commodity Futures Trading Commission, to take on a massive amount of work at a time when the agencies are straining to carry out the Dodd-Frank financial reform law.

“Many market participants spent north of $1 billion a year on technology, and we as an agency only spent $31 million last year, and this year … are actually cutting that back,” CFTC Chairman Gary Gensler told reporters.

By contrast, trading volumes are always printed, and while an FTT could push trading into “dark pools” off the exchanges, that would make the stock market significantly less attractive to the average person (which is also a good idea), and could be combined with some kind of “trade at” rule that forces a public sale price. At that point, the tax gets built in.

It will be years before such a rational idea even gets considered. But let’s remember that a blue-ribbon panel recommended it today.

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David Dayen

David Dayen

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