Industry Support for the Role of HFT in Saving Investors' Money

Industry Support for the Role of HFT in Saving Investors’ Money

Vanguard CEO Bill McNabb says HFT firms had helped investors cut their trading costs, and urged the US Securities and Exchange Commission not to reverse the market reforms that gave birth to the phenomenon.
– Financial Times interview with Vanguard CEO Bill McNabb

“(HFT is) working to tighten spreads and enhance liquidity … (investors) benefit by getting lower transaction costs. That results in hundreds of millions of dollars a year in savings to investors in our funds.”
– Gus Sauter, Retired Chief Investment Officer, Vanguard Group

“Main Street is the great beneficiary … We are better off with high-frequency trading than we are without it.”
– Jack Bogle, Vanguard founder, pioneer of low-cost investing

“Trading has never been easier and costs never lower thanks to human intermediaries being rendered obsolete.”
– Robin Wigglesworth, Financial Times

“In the decade of migration to electronic trading and HFT arrival, transaction cost decreased by over 50% for both retail and institutional investors.”
– Albert J. Menkveld, Professor of Finance, VU University Amsterdam

“By providing so many bids and offers, high frequency trading firms have narrowed pricing spreads.  Spreads for almost every financial instrument are substantially less than they were a decade ago.  For example, spreads in most US equities are half of what they were 10 years ago.”
– John Servidio and Bo Harvey, McGuireWoods LLP

“From an institutional or buy-side perspective, today’s markets are more efficient than anytime in the past.  Today’s markets are faster, they’re cheaper to trade, the typical buy-side desk has more choice due to competition in terms of execution venues, whether they’re block trading systems or dark pools, registered ATSs, and algorithms that we can customize that allow us to navigate electronic markets and obtain the best possible price for our fund shareholders.”
– Bill Baxter, Fidelity’s Head of Global Program Trading and Market Structure

“The world should be measured the following ways: The spread between bid and ask, and the commissions charged to do a transaction, are so dramatically smaller today — they’re measured in thousandths of a penny sometimes compared to when I was in the securities business.”
– Michael Bloomberg, founder and CEO, Bloomberg, LP

“High-frequency trading in general has been good for the retail investor.”
– Fred Tomczyk, CEO, TD Ameritrade

“Overall, HFT enhances market liquidity, reduces trading costs, and makes stock prices more efficient.”
– Charles Jones, Columbia University professor, study analyzing 30 papers on HFT

“As HFT activity has grown over the past 15 years, we have observed decreases in both implicit costs and explicit costs, such as brokerage commissions.  The end result is the ability to deliver more cost-efficient investment solutions to our clients.”
– Dimensional Fund Advisors

“Researchers found that Canadian bid-ask spreads increased by 9 percent in 2012 after the government introduced fees that effectively limited HFT.”
– The Atlantic magazine

We’ve come down nearly two orders of magnitude in that bid ask spread in the past 30 years. From around 0.20 percent to some 0.002 percent. That’s saved every investor huge amounts of money over all the trades they’ve done.
– Forbes

“[Electronic market making] brings tangible benefits to our clients through tighter spreads”
– BlackRock Viewpoint

“How do we feel about high-frequency trading? We think it helps us.”
– Cliff Asness, Founding Principal, AQR Capital Management

“… the increased use of electronic trading has brought many benefits, such as more efficient execution and lower spreads.”
– Timothy Massad, CFTC Chairman

“Numerous studies – including the recently released UK Foresight HFT project – have shown that transaction costs for both retail and institutional traders decreased substantially with the growth of high-frequency trading.”
– Larry Harris, USC Marshall School of Business, former chief economist at SEC 2002-04

“HFT provides many clear benefits, such as more market liquidity and generally lower transaction costs for participants. Speed by itself is not bad. Regulators and the industry need to tackle more appropriately market manipulation, which may happen in low-frequency as well as high-frequency trading environments.”
– Dominique Cerutti, Former president and deputy chief executive of NYSE Euronext

Further Resources

February 19, 2017: High Frequency Trading: The Path Forward for Market Liquidity and Stability
McGuireWoods capital markets attorneys John Servidio and Bo Harvey discuss the benefits of high frequency trading in the securities and derivatives markets.

July 19, 2016: How a Small Group of Traders Improved Markets for All (Video)
MMI CEO Bill Harts gives a short history of how market intermediaries that use high frequency trading tools have made trading cheaper and more efficient for investors.

June 2016: The Economics of High-Frequency Trading: Taking Stock
Professor Albert J. Menkveld conducted a survey of the academic literature on HFT. He read 100+ manuscripts to identify the economic arguments for and against HFT. He concludes that electronic markets and HFTs arrived and coincidentally transaction costs declined for investors. This suggests the identified economic benefits of HFTs outweigh their economic costs.

January 21, 2016: Op-Ed Why U.S. investors are better off today
Hal Scott, professor of international financial systems at Harvard Law School and director of the Committee on Capital Markets Regulation, writes that “U.S. investors are actually much better off in today’s high-speed automated marketplace.” He cites transaction costs for retail investors that have been cut in half since 2007 and mutual fund giant Vanguard estimates that “$10,000 invested in a mutual fund over 30 years would now yield a long-term investor $132,000 instead of $100,000.

June 2015: High-Frequency Trading around Large Institutional Orders
Professors Vincent Van Kervel and Albert J. Menkveld find that HFT provides liquidity for six hours to large buy side orders, to their benefit, and in doing so challenges the belief that HFT profits from quick “electronic front-running.” This prolonged period of HFT leaning reduces institutional trading costs by 39 percent and by extension all the individual investors they represent.

Dec. 1, 2014: SEC Division of Economic and Risk Analysis – Automated Liquidity Provision
The authors create a model showing how automated HFT liquidity providers set more efficient prices, increase informed and decrease uninformed traders’ transaction costs, and have no effect on volatility.

November 8, 2010: paper – Choking the Recovery
Harold S. Bradley, former head of trading for American Century Mutual Funds, co-authors a paper that finds, in 1988, the typical market maker netted about four cents in profit for every share traded. In contrast, the typical HFT today reportedly nets 7/100 of a cent or less for every share traded. In short, the HFTs are willing to work for 98 percent less than what the average market marker of yesteryear made.

June 2, 2010: Statement of George U. Sauter, Managing Director and Chief Investment Officer, The Vanguard Group at SEC Market Structure Roundtable
We think that much of the recent controversy surrounding “high frequency traders” and “dark pools” reflects a general lack of understanding of the benefits that such participants bring to the markets.  Based on decades of experience, it is our belief that high frequency trading and dark pools contribute to a more efficient market that benefits all investors.  Generally speaking, high frequency traders provide liquidity and “knit” together our increasingly fragmented marketplace resulting in tighter spreads that benefit all investors.

April 21, 2010: Vanguard Comment letter on SEC Concept Release on Equity Market Structure 
“…we conservatively estimate that transaction costs have declined 50 bps, or 100 bps round trip.  For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade.  Today’s investor with a 30 year time horizon would see a $10,000 investment in such a fund grow to approximately $132,000 in 30 years, compared to approximately $100,000 with the hypothetical return of 8% associated with the higher transaction costs.  Thus, any analysis of “high frequency trading” must recognize the corresponding benefits that long-term investors have experienced through tighter spreads and increased liquidity.

August 18, 2009: Paper – Algorithmic Trading and Information
Berkeley Professors Terrence Hendershott and Ryan Riordan examined three weeks of automated trading and identified that algorithmic trading “contributes more to the discovery of the efficient price than human trading.  Contrary to conventional wisdom we find no evidence of AT behavior that would contribute to volatility beyond making prices more efficient.”

HFT Strategies Across Markets With Single and Several Data Feeds

The Issue:

Maker-taker is a pricing scheme applied by exchanges or trading platforms. It gives a rebate to market makers providing liquidity (those offering to sell stock) and charges a transaction fee to customers who take liquidity (those looking to buy stock). Some believe the rebate system creates a conflict for brokers who may send order flow to a venue to secure the rebate and it should be abolished. SEC Chairman Mary Jo White, in a June 2014 speech, while not calling for abolition, said “when fees and payments (like maker-taker) are not passed through from brokers to customers, they can create conflicts of interest and raise serious questions about whether such conflicts can be effectively managed.”

MMI’s Stance:

Contrary to the widespread misconception that high frequency trading firms (HFTs) or Principal Trading Firms (PTFs) are reliant upon such rebates, MMI has stated publically that the abolition of the rebates is not a concern. Our Member firms trade on venues without maker-taker. And while eliminating them might mean a little less direct revenue for the firms, the incentives maker-taker provide to traders would probably find their way back into spreads and ultimately be borne by all investors. Which we assume is not the intention of regulators.

HFT Strategies the Same Regardless of Data Feed Variety or Speeds

The Issue:

Former SEC Chairman Mary Jo White has said that a “fairness concern” is the latency difference between the direct data feeds and the consolidated feeds. Some have argued that the lag between the speed in which direct feeds and slower consolidated feeds deliver refreshed stock prices could lead to an unfair advantage for those with the faster feeds. Chairman White suggests exchanges could “include affirmative or negative trading obligations for high-frequency trading firms that employ the fastest, most sophisticated trading tools. Such obligations would be analogous to the ones that historically applied to the proprietary traders with time and place advantages on manual trading floors.”

MMI’s Stance:

If the consolidated feed were replaced with direct feeds for all, it would not affect the strategies of our Member firms. In fact, our Members trade successfully in asset classes with only a single data feed, such as the U.S. Treasury market and the Chicago Mercantile Exchange here in the U.S., and in multiple geographies where there is also only a single data feed.

Suggestions to Safeguard Trading in the $2 Trillion ETF Industry

On most days, hundreds of millions of shares of exchange traded funds (ETFs) are traded with remarkable efficiency at a very low cost. The normally smooth functioning ETF market allows investors to easily get access to a wide range of investment portfolios at a very low cost. However, for about an hour on August 24th, 2015, circuit breakers interfered with regular ETF trading, and during that time some ETF’s traded at prices far from their fair value.

In an effort to help improve markets and ensure ETF prices do not get dislocated in the future, MMI wrote a letter to the U.S. Securities and Exchange Commission. In it, we suggested measures to protect investors and help professional intermediaries maintain orderly markets in Exchange Traded Funds (ETFs) during times of severe market volatility.

We proposed three practical solutions:

An optional “retail circuit breaker” that would protect investors from ETF prices that were a long way from their NAV.

Requiring exchanges to make clear when they would “break” a trade in an ETF.

Easing restrictions that would make it easier to hedge long ETF positions.

HFT Provides Liquidity in Fragmented and Non-Fragmented Markets

The Issue:

SEC Chairman Mary Jo White pointed out a “market structure concern is fragmentation. Order flow in exchange-listed equities is divided among many trading venues — 11 exchanges, more than 40 alternative trading systems, and more than 250 broker-dealers.” Ms. White said the Commission will “be considering whether the SEC’s own rules, such as the trade-through rule of Regulation NMS, have contributed to excessive fragmentation across all types of venues.”

MMI’s Stance:

Another widespread misconception is that high frequency trading firms (HFTs) or Principal Trading Firms (PTFs) rely on the opportunities presented by having several venues in which to trade. MMI advocates fewer venues and points out that its Members trade successfully in many markets and countries where there is only one exchange.

India and High Frequency Trading

India has the eighth largest economy in the world and its exchanges trade about $750 billion worth of stock per year.  Its markets have emerged to become a world-class trading ecosystem thanks in part to the increased participation of intermediaries who use high frequency trading tools.

However, the Securities and Exchange Board of India (SEBI) is in the midst of deciding if the progress of algorithmic trading innovations should be encouraged or suppressed. It recently sought comment letters on several proposals, most of which would impair the ability of these automated market makers to continuously provide the abundant and inexpensive liquidity to Indian investors that they contribute in other markets.

Unlike regulators in the U.S. and other markets, SEBI does not make comment letters public.  Below is a list of letters that MMI has been able to collect.  We will update this list as letters become available, and welcome copies of SEBI submissions from responsible parties.

August 29, 2016: Modern Markets Initiative
“MMI stands in broad support of global regulatory efforts to establish holistic, data-driven policies to best ensure the stability of trading platforms for all market participants.  However, in presenting an assorted menu of proposed mechanisms without analysis supporting their need or predicted effect, the SEBI proposal will likely create negative, unintended consequences.”

August 29, 2016: Estee Advisors
“SEBI has embarked on an important initiative to understand the impact of algorithmic and colocated trading on the Indian markets.  Algorithmic and colo-trading is a natural evolution of technology in the important field of securities markets.  Proper use of such technology reduces costs and improves efficiency.  However, increased speed does present some risks to the market.  Arbitrary speed bumps or other methods to thwart the advantage of technology will result in either no advantage or result in higher costs through increased bid ask spread or reduced liquidity.”

August 30, 2016: Association of National Exchanges Members of India
“We would request SEBI to base its decisions on data driven simulations and proven efficacy of the proposed steps in similar market microstructures.  It may be desirable to control any undesirable activity by market participants using surveillance improvements rather than changing the microstructure to prevent abuse of the markets, especially if there is a risk that the proposed changes could result in poorer liquidity/volumes.”

August 31, 2016: FIA
“We encourage SEBI to undertake further detailed analysis into any proposed market structure changes and potentially implement pilot programs for any proposed measures. If SEBI decides to introduce any pilot programs, we urge SEBI to provide market participants with adequate notice and the necessary technical information so that market participants are able to fully prepare for any proposed changes. We believe that SEBI can also work with trading venues and exchanges to enhance market supervision and identify abusive activity through improved surveillance, rather than changing market structure based on perceptions of inequality regarding market access.”

HFT in Treasuries has been a Great Outcome for Investors

The U.S. Treasury market is the deepest and most liquid government securities market in the world.  However, it lags far behind the equities market in terms of informational transparency.  There is little access to data around such basic metrics as which treasuries are trading and when they are trading, for example. Despite the challenges, high frequency traders (HFT) have been able to improve on the traditional and less automated ways of trading treasuries.  HFT, working on razor thin margins and serving as nimble and responsive intermediaries, now represent eight of the top ten dealers in the market according to a recently published BrokerTec list.

The beneficial role of HFT in the government debt market was brought into sharp focus in the aftermath of chaotic trading in the treasuries market on October 15, 2014.  On that day, extreme volatility produced a statistical deviation so severe, TABB Group Analyst Anthony Perrotta said such a move should occur once “every 1.6 billion years.”  Initially, many people blamed the role of proprietary trading firms (PTFs) using HFT tools for the “Flash Rally.”  But a multi-agency report analyzing the event looked separately at the actions of banks and PTFs on that day and discovered these market participants were both using HFT tools completely differently.

The report found that banks, the traditional dealers in treasuries “tended to widen their bid-ask spreads, and for a period of time provided no, or very few, offers in the order book in the cash Treasury market.” Contrast this with PTFs using HFT tools who “… continued to provide the majority of order book depth and a tight spread between bid and ask prices throughout the day, even during the event window.”

A supplemental finding of the report, unveiled at the conference hosted by the Federal Reserve Bank of NY in October 2015, found that while HFT was providing bid and ask quotes, banks were ignoring customer orders.

We believe that PTFs are better at automating trading than others, despite using similar trading tools.  In fact, PTFs using HFT tend to become the dominant intermediaries in the asset classes in which they participate.  This has been a great outcome for investors, as it introduces competition that drives down costs and fuels innovation that creates further money saving efficiencies.

Industry Support for the Role of HFT in the Treasury Market

“(HFT) as a group continued to provide the majority of order book depth and a tight spread between bid and ask prices throughout the day, even during the event window.”
– Joint Government Agency Report: The U.S. Treasury Market on October 15, 2014

“Automated trading has come to play a crucial role in fostering liquidity and the efficiency of the price discovery process in inter-dealer U.S. Treasury markets.”
– Automated Trading in Treasury Markets White Paper: Federal Reserve Bank of New York’s Treasury Market Practices Group

Regulation Automated Trading

On November 24, 2015, the U.S. Commodity Futures Trading Commission (CFTC) proposed Regulation Automated Trading (Reg AT), a set of rules now in the process of industry review and comment.  It represents “a series of risk controls, transparency measures, and other safeguards to enhance the U.S. regulatory regime for automated trading.”  In essence, it is recognition that the commodities and futures markets are increasingly served by high frequency trading firms.  Therefore, the rules governing those markets need to be updated to better suit electronic markets.

Modern Markets Initiative (MMI) largely supports Reg AT and most HFT firms already comply with most of its provisions.  We believe it is in the interest of all investors that participants are accountable to act in support of stable and resilient markets.

However, MMI has written three comment letters to the CFTC, a letter to the CFTC Technical Advisory Committee and contributed to a joint industry letter in opposition to the proposed rules within Reg AT allowing inspection of a trading firm’s source code under the provision of “book and records” because it makes the code accessible outside the existing, highly-regulated subpoena process.  Source code is the “secret sauce” of technology firms such as high frequency trading firms, Google and Apple, for example.  It is unprecedented for regulators to have routine access to this sensitive intellectual property.

MMI believes the Reg AT’s establishment of strict rules, regulations and guidelines will help instill investor confidence in the futures and commodities markets.  But it should not come at the cost of the legal protections of the market participants serving them.

What Lawmakers, Regulators and Others are Saying About Reg AT:

January 12, 2017: Amendment to the Commodity End-User Relief Act
Amendment sponsored by Rep. Sean P. Duffy [R-WI-7] prohibits the CFTC from compelling the production of algorithmic trading source code and similar intellectual property unless it has issued a subpoena.

January 11, 2017: Letter from the U.S. Chamber of Commerce to the U.S. House of Representatives
“The Chamber also supports the amendment sponsored by Congressman Duffy and Congressman Scott to clarify that the CFTC shall not have the authority to access proprietary source code without a subpoena. Their amendment would protect highly sensitive intellectual property, which would respect established due process rights and ensure that proprietary source code does not fall into the wrong hands as a result of a cyberattack or wrongdoing.”

November 18, 2016: Letter from K. Michael Conaway, Chairman of the House Committee on Agriculture to CFTC Chairman Timothy Massad
“President Obama told the public that he was looking forward to doing everything he could to make sure the next administration is successful. That must include preserving difficult and controversial rulemaking for the next chairman to complete. I urge you to extend the Reg AT comment period by 180 days, which will provide the new chairman time to plan and announce a new agenda to the public and allow commenters the opportunity to file one comment letter on the supplemental and any additional proposed changes.”

November 4, 2016: Statement of Dissent by Commissioner J. Christopher Giancarlo Regarding Supplemental Notice of Proposed Rulemaking on Regulation Automated Trading
“The subpoena process provides property owners with due process of law before the government can seize their property. It protects owners of property – not the government that already has abundant power. It allows property owners an opportunity to challenge the scope, timing and manner of discovery and whether any legal privileges apply to the process of surrendering property to the government … Abrogating the legal rights of property owners is not assuaged by imposing a few additional procedural burdens on the government agency seizing their property.”

August 10, 2016: Letter from Representative Sean P. Duffy to the U.S. SEC
Representative Sean P. Duffy (WI-7), Chairman for the House Financial Services Subcommittee on Oversight & Investigations, wrote to the Chairman of the SEC expressing concern over the CFTC proposal to maintain a source code repository and make it available for inspection by the Commission or the Department of Justice without a subpoena. He wrote “as a former prosecutor, I take very seriously the due process rights of Americans under the Fifth Amendment which I believe would be undercut by the source code provision of the CFTC’s proposed rule.”

August 3, 2016: Letter from Congressmen Scott Garrett & Randy Neugebauer to CFTC
Representative Scott Garrett (NJ-05), Chairman of the Subcommittee on Capital Markets for the House Financial Services Committee and Representative Randy Neugebauer (TX-19), majority member of the House Committee on Agriculture which oversees the CFTC, wrote to the CFTC expressing concern over the prospect of the CFTC having subpoena-less access to source code. They wrote “it will create a due process ‘race to the bottom’ as other regulators, both in the United States and overseas, would be tempted to follow the CFTC’s lead.”

June 10, 2016: Letter from seven Congressmen on the House Committee on Agriculture and one from the Homeland Security Committee to the CFTC
Representatives Sean P. Duffy (WI-7), David Scott (GA-13), Austin Scott (GA-8), Bob Frank Lucas (OK-3), Rodney Davis (IL-13), Bob Goodlatte, and Randy Neugebauer (TX-19) of the House Committee on Agriculture which oversees the CFTC, and Representative Michael McCaul (TX-10), Chairman, Committee on Homeland Security, wrote to the CFTC to express concern over the prospect of the CFTC having subpoena-less access to source code. They wrote “we question whether the proper security and due process safeguards are in place to prevent such information from being compromised or mishandled.”

MMI Supports the Registration of HFT Firms with FINRA

The Issue:

On March 25, 2015 the Securities and Exchange Commission proposed rule amendments to require that broker-dealers trading in off-exchange venues become members of a national securities association. The amendments were aimed to enhance regulatory oversight of active proprietary trading firms, such as high frequency traders.

MMI’s Stance:

We support efforts at greater transparency to boost investor confidence in the modern markets. Our Member firms are all registered with the U.S. Securities and Exchange Commission, the CBOE and, through their registration with several exchanges, the Financial Industry Regulatory Authority.

Effects of a Financial Transaction Tax

All Investors Affected

A Financial Transaction Tax (FTT) will hurt all investors because it will directly affect everyone who has a portion of their retirement savings or other assets, in the financial market. When investments are reallocated to reflect an investor’s changing risk profile, need for a redemption to cover expenses or rebalancing to keep an investment strategy on track, the tax will apply. That is money that could be compounding to grow assets. And gains are already taxed so this could be seen as a way to tax losing stock trades as well. It’s a bad deal for investors.

A Financial Transaction Tax Would Weaken the Market

Any tax on transactions will add friction that threatens our market, which is the world’s best engine of capital formation, economic growth and job creation. History has shown a transaction tax drives trading away from the country imposing it, therefore reducing the potential revenue from trading activity such as capital gains taxes, while shipping well-paying, and highly taxed, jobs and companies out of the country.

In March 2013, the Italian government imposed an FTT on stocks of corporations with a market capitalization above 500 million euros. The result, as observed in a studypublished in August 2016 by the European Central Bank, has been “a reduction in liquidity for the stocks hit by the reform.” And increased “volatility of the ‘treated’ stocks.” In other words, the stock became more expensive and their prices less stable.

When Sweden began taxing financial transactions in the 1980s, bond trading fell by 85% and futures trading fell by 98%. By 1990, more than 50% of all Swedish trading moved to London. The tax was declared a failure and repealed in 1991. Recently, Sweden’s Finance Minister Anders Borg quipped “between 90%-99% of traders in bonds, equities and derivatives moved out of Stockholm to London” because of that FTT.

After one-third of the trading in German public companies moved to London and trading in German bonds sank as much as 50 percent, Germany abolished its FTT in 1991. In Italy, a FTT caused trading in Italian stocks to fall by 34.2% within two years of the introduction of the tax according to research from Credit Suisse.

It Doesn’t Raise the Revenue Expected

In Italy, an FTT imposed in 2012 has raised just €159 million of a targeted €1 billion. France, which introduced its FTT a year later, initially predicted €1.5 billion annually in revenue, but has yet to raise even half that much so far. Both countries may see the same results Sweden did when it instituted its FTT. Revenues on bonds, for example, were predicted to be SEK 1.5 billion per year but the average was closer to SEK 50 million.

A More Targeted FTT Will Likely Also Backfire

A variation of the transaction tax proposed is a levy on “excessive levels of order cancellations.” However, a tax on authentic market making efforts will limit an inexpensive and effective way for investors to determine a fair price. The ability to negotiate prices freely has helped limit trading risks and thus made the costs to trade very low.  In fact, a study by professors Jesse Blocher, Ricky Alyn Cooper, Jonathan Seddon and Ben Van Vliet finds that “the only thing occurring during high levels of cancellation activity is HFT firms seeking the correct price level. This is good for the market. It means that HFT firms process information and help improve price discovery without the need for intermediate executions.”

In addition, defining how much legitimate order cancelling is “excessive” will be difficult and dependent on such factors as the complexity of the stock (some ETFs have thousands of underlying constituents) and the tradability of the stock (some stocks trade sporadically and some very often). Setting an improper limit will hinder competition among HFT intermediaries and raise costs for investors.

It’s a “Speculators Tax” That does not Target Speculators

One thing FTT proposals have in common is its positioning as a punitive measure against “Wall Street speculators” who fueled the financial crisis of 2008 that required a taxpayer-funded bailout. But high frequency traders had nothing to do with designing the over-leveraged bank positions that caused the crisis.

It Can Happen Here

Although some dismiss a financial transaction tax as an idea that has been discussed and dismissed many times, the same was said in Europe, where 10 EU countries are poised on the brink of instituting an FTT. In the U.S., all three Democratic presidential candidates have financial transaction tax proposals. This is of particular interest since, as The Wall Street Journal points out “each of the past three presidents ran in part on a tax plan and each got much of it implemented by the end of his first term.”


In short, an FTT has proven to drive trading to other countries, fall short of revenue expectations, sharply depress trading volumes and increase investor’s costs to trade. Collectively it would be an economic disaster for America.


What Experts are Saying About Financial Transaction Taxes:

“High-frequency trading plays a critical role. When you put a tax on transactions, you risk damaging liquidity. As mutual fund investors we rely on having liquidity,” he added. “A drop in liquidity is bad for fund shareholders.”
– Tim Buckley, Chief Investment Officer, Vanguard Group

“Quite frankly, an FTT is a terrible idea.  It would harm all investors, especially middle-income American workers saving for retirement.  We have yet to see a FTT proposal that would not hurt Main Street nor weaken our capital markets.”
– Investment Company Institute, a trade group representing 90 million investors in US mutual funds

“The fundamental problem with FTTs is that they are distortionary; for example, by driving down stock prices, they make raising capital more expensive for firms. In the long run, this lowers labor productivity and wage levels.”
– Kenneth Rogoff, Professor of economics and public policy at Harvard University and past chief economist of the International Monetary Fund from 2001-03

“Seemingly small changes such as a financial transactions tax can cause considerable damage far from Wall Street, harming both investors and American businesses and impeding job recovery and growth.”
Professors Charles Jones and Erik Sirri, in a paper for the U.S. Chamber of Commerce

“The most troubling outcome (of a financial transaction tax) could be that consumers, mom and pop investors, pensioners and end users (those actually using markets to hedge their legitimate business risk) wind up being victims of such a mindless—perhaps momentary lapse of reasoned—policy.”
– Bart Chilton, Former CFTC Commissioner

“Politicians think of this (financial transaction tax) as a tax on the guys that caused the financial crisis.  It’s a tax on investors.”
– Keith Lawson, senior counsel at the Investment Company Institute

“(Financial transaction taxes) wind up being paid for by the mom-and-pop investors at the end of the day.”
– James J. Angel, Associate Professor of Finance, Georgetown University

“We found a significant increase in the bid-ask spread.  There is also evidence of an increase in the volatility of the taxed stocks.”
– European Central Bank study on the Italian Financial Transaction Tax

“The evidence from Europe over the past few years suggests a financial transaction tax in the UK would be one of the most catastrophic regulations ever to hit the financial sector.”
– Ben Wright, Group Business Editor, The Telegraph

“…highly risky and costly to all investors to introduce an FTT of any design.”
– Jim Toes, Security Traders Association President and CEO

“There are few taxes that are as damaging and counter-productive as transaction taxes.  Even before Adam Smith, all economists understood that economic progress is generated by trade: it leads to the division of labour, the division of knowledge and the creation of wealth. Transaction taxes … reduce trade and economic exchanges, and hence slow down economic improvements.”
– Allister Heath, Deputy director of content and deputy editor at The Telegraph

“A tax which would damage savings, reduce liquidity and cut economic growth whilst being unlikely to raise much revenue anyway just does not seem worth it.”
– Adam Memon, Head of Economic Research at the Centre for Policy Studies

“An FTT affects the economy … that over the long term it actually reduces, not increases, tax revenue.”
– Tim Worstall,

“New life for a bad idea”
– The Economist, regarding revived financial transaction tax discussions among the European Union

“… an FTT will actually produce lower government revenue due to falling profits in the financial industry. And that benefits precisely no one.”
– Professor Moorad Choudhry, Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland

“Hillary Rodham Clinton has now followed Bernie Sanders and Martin O’Malley in calling for a tax on the traders who, they complain, use their high-speed computers and expensive data lines to pick the pockets of ordinary investors. The odd thing about all this concern is that most of the investors who are actually facing off against the high-frequency traders — often on behalf of retirement savers — don’t see this as anything like the most costly problem they are facing, even in the arcane realm of trading mechanics.”
– The New York Times

“An FTT will create unintended investment incentives and undermine sound asset management principles such as diversification, proper hedging and efficient execution. Perversely, as a result of an FTT, active portfolios will be forced to take higher levels of risk and/or invest to a greater extent in derivatives in order to deliver the same level of return to clients. It will also reduce market liquidity and increase volatility, further hurting investment performance for pensioners and savers.”
– BlackRock

“A FTT at the rates being proposed and adopted elsewhere would discourage all trading, not just speculation and rent seeking. It appears as likely to increase market volatility as to curb it. It would create new distortions among asset classes an across industries. As a tax on gross rather than net activity, and as an input tax that is not creditable and thus cascades, the FTT clearly can most optimistically be considered a second-best solution.”
– Tax Policy Center

“Empirical evidence provides little indication that a transaction tax would reduce volatility. In fact, a number of research studies have concluded that higher transaction costs are associated with more, not less, volatility.”
– Congressional Budget Office

“Little evidence is found to suggest that an FTT would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume. Furthermore, a number of challenges associated with the design and effectiveness of an FTT could limit the revenues that FTTs are intended to raise. For these reasons, countries considering the imposition of FTTs should be aware of their negative consequences and the challenges involved in implementation.”
– Bank of Canada

“However, Italy’s experience shows that while this sort of tax … is effective at reducing trading volumes, it isn’t very good at raising money.”
– Assistant Professor Noah Smith, Stony Brook University

“Many developed nations, including the United Kingdom, Germany and Japan have imposed transactions taxes on securities trades, and their experience suggests that the alleged benefits of the tax are likely to be small while the resulting costs and distortions would be large.”
– Burton G. Malkiel, author of “A Random Walk Down Wall Street”

“The FTT would negatively impact the real economy and pensioners would bear the costs.”
– PensionsEurope, an organization with 24 member associations in 19 EU Member States and 3 other European countries with significant workplace pension systems.

Finance Magnates – EU Financial Transaction Tax Shaken as Race for London Jobs Intensifies

Victor Golovtchenko reports London’s bankers have been outspoken about their plans to leave London in light of the Brexit process that is being prepared by the UK government. As they contemplate the move, the European Union is considering a financial transaction tax. Some of the main contenders for a new European financial hub are immune from the risks of a financial transaction tax – Dublin, Copenhagen and Amsterdam. The position of Paris and Frankfurt could be well jeopardized by their support for the tax proposal.

Bloomberg – EU Financial-Transaction Tax Said to Hit Roadblock Over Pensions

Bloomberg – EU Financial-Transaction Tax Said to Hit Roadblock Over Pensions
Alexander Weber and Nikos Chrysoloras report that the 10 European Union countries exploring a financial-transaction tax are struggling to agree on key parts of the plan, casting new doubt on the future of the project.  A task force working on possible exemptions for pension funds has so far failed to come up with a solution that satisfies all nations involved.  A general opt out for pension funds from the tax would have to be extended to insurance companies. Exempting insurance from the levy would mean that the revenue raised is too small to justify it.

Luxemburger Wort – Luxembourg lawmaker calls for clarity as Belgian support for FTT wavers

Luxemburger Wort – Luxembourg lawmaker calls for clarity as Belgian support for FTT wavers
A report that Deputy Laurent Mosar of Luxembourg’s Christian Social People’s Party has called on Luxembourg’s Ministry of Finance to confirm whether the Benelux countries have a “common position” on the controversial Financial Transaction Tax (FTT).   This was in reaction to news that Belgium and Slovakia were considering withdrawing their support of an FTT, partly over worry that it would have too great an impact on its pension funds and real economy.  The withdrawals would drop EU member participation below 9 countries, the minimum needed for passage of a pan-European FTT.

Study – The impact of the French financial transaction tax on high frequency trading activities and market quality

Study – The impact of the French financial transaction tax on high frequency trading activities and market quality
Researchers Iryna Veryzhenko, Etienne Harb and Wael Louhichi analyze the impact of the French high-frequency trading transaction tax on market quality measured by market liquidity and volatility. It finds that the introduction of cancel order tax reduces only slightly HFT activities, but it significantly affects market liquidity, increases market volatility and deteriorates the market efficiency.

European Central Bank Working Paper Series – Financial transaction taxes, market composition, and liquidity

Jean-Edouard Colliard and Peter Hoffmann of the European Central Bank co-author a paper that empirically examines the 2012 introduction of a financial transaction tax (FTT) on equity trading in France. It concluded that the French FTT was to a large extent a disguised tax on savers.  Also, they found “no evidence for the composition effect through which an #FTT is supposed to improve market quality.”

Financial Transaction Taxes, Market Composition, and Liquidity

European Central Bank Working Paper Series – Financial transaction taxes, market composition, and liquidity
Jean-Edouard Colliard and Peter Hoffmann of the European Central Bank co-author a paper that empirically examines the 2012 introduction of a financial transaction tax (FTT) on equity trading in France. It concluded that the French FTT was to a large extent a disguised tax on savers.  Also, they found “no evidence for the composition effect through which an #FTT is supposed to improve market quality.”

ValueWalk – Why Did Regulator Have Computer Trading Code On Personal PC?

ValueWalk – Why Did Regulator Have Computer Trading Code On Personal PC?
Mark Melin writes that a 2016 SEC Office of Inspector General (OIG) report contains a little-noticed reprimand of an SEC quantitative analyst charged with improperly requesting and downloading confidential computer code to his personal computer.  This as measures in the CFTC’s pending Reg AT call for regulators to have subpoena-less access to source code used by professional traders.

Financial News – Possible Consequences of the Pending Trump Presidency on Reg AT

Financial News – Possible Consequences of the Pending Trump Presidency on Reg AT
Tim Cave reports Bill Harts, chief executive of New York-based HFT advocacy group Modern Markets Initiative, said that as a result of the election of Trump, the 2005 equity trading regulation Regulation NMS may be reviewed.  He also pointed out that Regulation AT – the CFTC’s new rules overseeing algorithmic trading which include a controversial provision for regulators to freely access firms’ computer code – could also be stalled. “It has yet to enter its 60 day comment period and the inauguration is only 71 days away. It seems unlikely you will see something happen on this issue in that time frame.”

WSJ – Wall Street Frets About Cybersecurity as U.S. Demands More Data

WSJ – Wall Street Frets About Cybersecurity as U.S. Demands More Data
Andrew Ackerman reports Federal regulators are demanding a vast trove of private data to help them better monitor markets. But in the age of routine, sophisticated hacks, many in the financial industry worry the government will be unable to keep that sensitive information secure.  Investment firms cite numerous breaches at federal agencies, most recently the late-October admission by the national bank overseer that a former employee had downloaded 10,000 records with two thumb drives and took them home.

Financial Times – CFTC set to tweak rules for automated trading

Financial Times – CFTC set to tweak rules for automated trading
Gregory Meyer and Joe Rennison report The Commodity Futures Trading Commission’s proposal, known as Regulation AT, seeks subpoena-less access to source code as part of its oversight of markets. Bill Harts, chief executive of Modern Markets Initiative, a trading industry group, said: “It would not remediate the problems. We are still frankly in the dark. The CFTC still hasn’t said why the current process of obtaining a subpoena doesn’t work. If they don’t say why that isn’t working then how can we propose meaningful revisions to what they want to do?”