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

GARY WATERS
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In defence of expertise: it’s time to take the heart out of “passionate” politics

What we need is cool logic.

We are living through a bonfire of the experts. During the EU referendum campaign, Michael Gove explained that people had had enough of them. A few weeks later, his fellow Tory MPs took him at his word and chose a relative ingénue to run against Theresa May.

After declaring for Andrea Leadsom in the Tory leadership race, Michael Howard was asked whether it might be a problem that she had never held a position higher than junior minister. Howard, whose long career includes stints as home secretary and opposition leader, demurred: “I don’t think experience is hugely important.”

Even in this jaw-dropping season, that comment caused significant mandibular dislocation. I thought: the next Tory leader will become prime minister at a time of national crisis, faced with some of the UK’s most complex problems since the Second World War. If experience doesn’t matter now, it never does. What does that imply about the job?

Leadsom’s supporters contended that her 25 years in the City were just as valuable as years spent at Westminster. Let’s leave aside the disputed question of whether Leadsom was ever a senior decision-maker (rather than a glorified marketing manager) and ask if success in one field makes it more likely that a person will succeed in another.

Consider Ben Carson, who, despite never having held elected office, contested the Republican presidential nomination. He declared that Obamacare was the worst thing to happen to the United States since slavery and that Hitler may have been stopped if the German public had been armed. Yet Carson is not stupid. He is an admired neurosurgeon who pioneered a method of separating conjoined twins.

Carson is a lesson in the first rule of expertise: it does not transfer from one field to another. This is why, outside their domain, the most brilliant people can be complete dolts. Nevertheless, we – and they – often assume otherwise. People are all too ready to believe that successful generals or entrepreneurs will be good at governing, even though, more often than not, they turn out to be painfully inept.

The psychologist Ellen Langer had her subjects play a betting game. Cards were drawn at random and the players had to bet on whose card was higher. Each played against a well-dressed, self-assured “dapper” and a shabby, awkward “schnook”. The participants knew that it was a game of chance but they took more risks against the schnook. High confidence in one area (“I’m more socially adept than the schnook”) irrationally spilled over into another (“I’ll draw better cards”).

The experiment points us to another reason why we make poor judgements about competence. We place too much faith in social cues – in what we can see. As voters, we assume that because someone is good at giving a speech or taking part in a debate, they will be good at governing. But public performance is an unreliable indicator of how they would cope with running meetings, reading policy briefs and taking decisions in private. Call it the Boris principle.

This overrating of the visible extends beyond politics. Decades of evidence show that the job interview is a poor predictor of how someone will do in the job. Organisations make better decisions when they rely on objective data such as qualifications, track record and test scores. Interviewers are often swayed by qualities that can be performed.

MPs on the Commons education select committee rejected Amanda Spielman, the government’s choice for the next head of Ofsted, after her appearance before them. The committee didn’t reject her because she was deficient in accomplishments or her grasp of education policy, but because she lacked “passion”. Her answers to the committee were thoughtful and evidence-based. Yet a Labour MP told her she wasn’t sufficiently “evangelical” about school improvement; a Tory asked her to stop using the word “data” so often. Apparently, there is little point in being an expert if you cannot emote.

England’s football team is perennially berated in the media for not being passionate enough. But what it lacks is technique. Shortly before Wales played England in the European Championship, the Welsh striker Gareth Bale suggested that England’s players lacked passion. He knew exactly what he was doing. In the tunnel before kick-off, TV cameras caught the English goalkeeper Joe Hart in a vessel-busting frenzy. On the pitch, Hart allowed Bale to score from an absurdly long range because he was incapable of thinking straight.

I wish there were less passion in politics and more cool logic; less evangelism and more data. Unthinking passion has brought the Labour Party to its knees and threatens to do the same to the country. I find myself hungering for dry analyses and thirsting for bloodless lucidity. I admire, more than ever, those with obscure technical knowledge and the hard-won skills needed to make progress, rather than merely promise it.

Political leadership is not brain surgery but it is a rich and deep domain. An effective political leader needs to be an expert in policy, diplomacy, legislative process and how not to screw up an interview. That is why it’s so hard to do the job well when you have spent most of your time in boardrooms or at anti-war rallies.

If democratic politicians display contempt for expertise, including their own, they can hardly complain if those they aspire to govern decide to do without the lot of them. 

Ian Leslie is a writer, author of CURIOUS: The Desire to Know and Why Your Future Depends On It, and writer/presenter of BBC R4's Before They Were Famous.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt