A Robin Hood Tax will stop the machines wiping out the market

A small tax on each transaction will stop pointless yet risky high-frequency trading.

From Terminator to the Matrix, our fear that humanity may be supplanted by the machines we create has helped Hollywood make mega-bucks. But while Arnie’s cyborg killing machine and the Neo’s alternative reality remain firmly in the realms of science fiction, our financial sector’s love of a fast buck is leading us to cede control of markets to computers with sometimes disastrous consequences.

The extent to which financial markets are now dominated by computer-driven high frequency trading was revealed again last week, when Knight Capital, a leading New York trading firm made a mistake in its computer programming. The rogue programme swamped the stock market with errant trades, cost the firm $440 million and put the future of the firm in jeopardy.

So what? I hear you ask. Why should we care if a firm of traders loses millions because they rushed out a new computer programme before it was ready?

The fact is that beyond acting as a casino for traders to make or lose fortunes, financial markets are crucial to the functioning of the global economy. They are supposed to allocate resources efficiently and help firms raise capital and manage risk. When things go wrong, as in the crisis of 2008, the consequences for the real economy can be devastating.

A growing number of economists and financial experts – including more than 50 financiers who wrote a recent letter to David Cameron and other world leaders – are warning that unchecked high-frequency trading undermines markets’ economic efficiency and risks disaster. In May 2010, the most infamous "flash crash" dragged the Dow Jones index of shares down nine per cent with more than half the fall happening in just seven minutes. Shares in Accenture plunged from $40 per share to just $0.01, almost wiping out the value of the company.

High frequency trading (HFT) conducted may now account for more than three-quarters of all equity deals in the UK. When you consider that this sort of trading, managed by computers according to complex algorithms, was almost unheard of seven years ago, it is hard to avoid the conclusion that traders have been competing in a technological arms race that has left regulators floundering.

So what can be done? As anti-nuclear campaigners have discovered, it is not possible to un-invent a technology once the genie has left the bottle. But fortunately this is not necessary. High-frequency trading is only profitable because of the sheer volume of trades carried out; the profit margin on each trade is incredibly low.

A tiny tax of a fraction of a percent on each transaction would curb the worst excesses of this cyborg-style casino capitalism, while having little effect on long-term investments such as pensions where trades are carried out far less frequently.

European leaders are working towards such a tax – covering stocks, bonds and derivatives – but the UK government has chosen to side with City interests rather than back the efforts of Germany, France, Spain, Italy and others to make finance work in the interests of society rather than the other way around.

UK opposition to the tax, based as it is on the claim that such taxes have to be global to work, is somewhat ironic. The UK already has an FTT on shares, known as the Stamp Duty, which at 0.5 per cent is many times larger than the proposed European tax (0.1 per cent for shares and bonds, 0.01 per cent for derivatives). The problem is that banks, hedge funds and other high-frequency traders avoid the stamp duty by trading in derivatives.

Extending the UK’s existing FTT to derivatives and bonds would not only "throw sand in the wheels" of HFT and therefore increase stability in financial markets and the wider-economy; it would also raise billions in revenue – the reason the Robin Hood tax campaign is backed by almost 120 organisations from Oxfam to the TUC and by global figures such as Kofi Annan and Bill Gates.

Despite avoidance, the UK Stamp Duty raise £3bn a year. A full-blown FTT could raise as much as £20bn – money that could be used to help those hit by the economic crisis at home and abroad and to meet the UK’s obligations to help poor countries cope with climate change.

It can be done. The UK’s Stamp Duty is one of 40 or so FTTs that already exist around the world. Hong Kong has introduced an FTT on derivatives precisely to curb the excess of computer-driven trading. Charles Li, Chief Executive of the Hong Kong Stock Exchange, says it "effectively limits high frequency trading, just like a highway with many toll booths limits speeding."

By rejecting a broader FTT, the UK government is making its own bet on the markets. It is accepting instability and forgoing much needed revenue in the hope the City’s casino capitalism will help drive recovery from recession.

It is a risky bet. As Andrew Haldane, Executive Director of Financial Stability at the Bank of England has put it:

"Grit in the wheels, like grit on the roads, could help forestall the next crash."

"Whoa" ~ Neo, The Matrix. Do we all fear that machines will supplant us?

Jon Slater is a Senior Press Officer for Oxfam and a spokesperson for the Robin Hood Campaign

Photo: Getty
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Who will win the Copeland by-election?

Labour face a tricky task in holding onto the seat. 

Too close to call, neck-and-neck, down to the wire. Pick your cliché for a close-run thing, and that’s what the parties are saying about Copeland.

No governing party has won a seat in a by-election since 1982, and the seat has been Labour-held since 1935, but the circumstances could scarcely be more favourable to the Conservative Party. They are well ahead in the opinion polls and Labour’s electoral coalition is badly split over Brexit.

To add to the discomfort, Jeremy Corbyn, the Labour leader, has a long history of opposing nuclear power, though he has sounded a more supportive note since becoming leader. Sellafield is the main employer there, so regardless of the national picture, that would be an added complication.

Given the competing pressures from the Liberal Democrats on one side and the Conservatives and Ukip on the other, Labour should expect significant erosion in the 42 per cent of the vote they got in 2015. To win, all the Conservatives have to do is tread water. And it's worth noting that so far in this parliament, the results in by-elections have been what you'd expect according to the current state of the parties in the polls - which would mean you'd back Labour to win Stoke but the Tories to win Coepland. 

That Theresa May has visited the seat attests to the closeness. Privately, neither party can be confident of winning. For the Conservatives, that makes it worth putting Theresa May, currently the most popular politician in Britain if the polls are to be believed, into the fray, because what have they got to lose? For the Labour leadership, there is nothing to "win" if they hold a seat in opposition, but there is something to lose if they cannot hold it and Corbyn has visited in the final week. 

What is keeping Labour competitive is the state of the health service in Cumbria. If West Cumberland, the hospital, is closed, then residents will face a two hour drive to the nearest hospital.

The local “success regime” is the cause of significant public opposition. "There are a lot of people who are angry about Jeremy, angry about Trident [the submarines are made nearby]," says one MP, "But they also understand that if they vote Labour they will not be bringing in a government that closes Sellafield but they can send a message about West Cumberland [the hospital that is under threat of closure]."

So Labour have reason to be more cheerful than the bookmakers are concerned. The outcome will come down to what the question that voters are asking when they vote is: if it is nuclear power, the Tories will win. If it is healthcare, Labour will triumph.

In that, May’s visit has probably helped Labour on balance. She could have decisively shifted the contest by making a commitment to keep West Cumberland open and to secure the future of the Moorside nuclear plant. But she did neither, and instead that meant that the local newspaper splashed on her refusal to confirm that the hospital was safe. Which, in a close election, may well be the difference as far as winning and losing are concerned. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.