creators.com opinion web
Conservative Opinion General Opinion
David Sirota
David Sirota
11 Apr 2014
The Chicago Way

In America, there is regular ol' corruption, and then there is Chicago Corruption, with a capital "C." America'… Read More.

4 Apr 2014
The Labor Market's Double Standards

Technology, sports and politics are distinct worlds. They have their own junkies, their own vernaculars and … Read More.

28 Mar 2014
Let Them Eat NCAA Brackets

In historians' quest to find the perfect anecdote to summarize this era of unprecedented economic inequality, … Read More.

Will Government Use Its New Leverage Over the Financial Industry?

Comment

If you read one business book this year, make it "Flash Boys" by Michael Lewis. The journalist famous for "Moneyball" and "The Big Short" takes readers inside the parasitic world of high-frequency trading that is harming the broader economy.

The technical architecture of high-frequency trading is right out of a sci-fi movie — the schemes rely on algorithms that seem artificially intelligent, and the velocity of transaction signals approach light speed. As Lewis recounts, all that technological wizardry is marshaled to let insiders know information before everyone else, which consequently lets those insiders extract wealth from the market.

The good news is that a financial transaction tax can at once raise public resources and disincentivize the most predatory schemes. The even better news is that structural changes in the industry have made such a tax more economically viable than ever.

Before getting to that change, consider the basics of the tax proposal. The idea is that if a tiny fee is slapped on securities transactions — say, a cent — the tax will barely affect the average investor but will force high-frequency, high-volume traders to pay a lot. Consequently, those predators might see less of an upside from — or even abandon - their market-rigging schemes. And if they don't, then at least the government will generate new resources to enforce laws protecting average investors.

Of course, when this idea gained steam before, it was deflated by those arguing that the tax would prompt stock exchanges to move to jurisdictions that don't impose such a levy. In this tale, the city, state or country that creates a transaction tax won't stop high-frequency trading — it will only hurt itself by driving financial business to another locale.

On its face, it is a powerful argument — so powerful, in fact, that when Chicago's municipal government recently considered a financial transaction tax, the proposal was quickly dismissed.

The Illinois legislature then gave the Chicago Mercantile Exchange an $85 million tax cut when company executives threatened to move the company out of state.

No doubt, fear of such flight seems logical. Essentially, tax opponents ask us to assume that in the Internet era, stock exchanges — like many other information-sector enterprises — are no longer moored to specific geographies because they can supposedly conduct business through any digital conduit.

But that's where the aforementioned structural change has created a flaw in the logic. In a financial world where microseconds are now king, all conduits are not created equal and average Internet velocity is no longer enough. That reality potentially reduces some of the industry's geographic mobility. Why? Because while speculators themselves no longer need to physically be on specific trading room floors, they do need their computers to either be physically near those exchanges' computers or hooked up to them through special ultra-fast conduits. Additionally, the newly computerized exchanges need ever-more massive data centers and conduits to process the accelerating information flow.

All of that technology requires financial firms to make huge investments in lots of immobile digital infrastructure. That means it may now be prohibitively expensive and/or logistically difficult for those financial firms to simply pick up and move. Indeed, just like petroleum companies cannot realistically threaten to leave oil-rich locales if they don't like a tax, parts of the financial world are captive to the locales in which they've built their digital systems.

This is the silver lining of speed-driven finance. Simply put, the federal, state and local governments that host the financial industry have more leverage because, despite threats, they don't have to fear the industry leaving.

The only question, then, is political: Will those governments use this new leverage? Or will they do nothing to protect the average investor?

David Sirota is a staff writer at PandoDaily and the best-selling author of the books "Hostile Takeover," "The Uprising" and "Back to Our Future." Email him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.

COPYRIGHT 2014 CREATORS.COM



Comments

1 Comments | Post Comment
No need to fear the exchanges moving. Just collect the tax at the point of the electronic exchange through the banks. Auto deposit right into the treasury's checking account. Unless everything is held in cash, a US penny will go through a US bank.
Comment: #1
Posted by: Daniel Becker
Fri Apr 18, 2014 9:57 AM
Already have an account? Log in.
New Account  
Your Name:
Your E-mail:
Your Password:
Confirm Your Password:

Please allow a few minutes for your comment to be posted.

Enter the numbers to the right:  
Creators.com comments policy
More
David Sirota
Apr. `14
Su Mo Tu We Th Fr Sa
30 31 1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 1 2 3
About the author About the author
Write the author Write the author
Printer friendly format Printer friendly format
Email to friend Email to friend
View by Month
Marc Dion
Marc DionUpdated 21 Apr 2014
Mark Shields
Mark ShieldsUpdated 19 Apr 2014
Ted Rall
Ted RallUpdated 18 Apr 2014

14 Nov 2008 Knowing When To Walk Away

6 Nov 2009 We Are What We Trade and How We Trade It

12 Feb 2010 Time To Get Serious About the Budget