Yet again, the UK government has sided with the robotraders on a Robin Hood Tax

A financial transactions tax is the most economically efficient way to lessen the harm of HFT – but the government keeps fighting it.

Fifteen years ago the computer program Deep Blue made headlines around the world by beating chess giant Garry Kasparov. In the years since, computer algorithms have quietly gone on to dominate large parts of the financial markets.

Computer-driven trading now accounts for 70 per cent of trading in the US equity market, 36 per cent in the UK. Machines fire tens of thousands of trades a second, relying on state-of-the art technology and proximity to stock exchanges to shave microseconds off transaction times.

Yet tiny errors in the algorithms can have devastating consequences. During the infamous 'Flash Crash' of 2010 the Dow Jones index dropped nine per cent in a matter of minutes. Over the summer Knight Capital – a leading New York HFT (high frequency trading) firm – erroneously swamped the stock market with errant trades, wiping $440m from the firm's value.

That's why the European Parliament's powerful Economic Affairs Committee this week voted through legislation – the Markets in Financial Instruments Directive II – designed to curb HFT. A key proposal being that trades will have to be posted for at least 500 milliseconds (currently traders can execute 10,000 trades during the same period).

Proponents of HFT argue their churning sea of trades brings liquidity to the markets. The reality is more capricious - in times of crisis traders pull the plug, draining liquidity when it is needed most.

Adair Turner described such corners of financial markets as "socially useless". The Financial Times recently said “hard evidence and common sense point to a host of social benefits from removing unnecessary intermediation and curbing predatory trading strategies”, adding that in some areas Mifid II was simply too mild.

It's no surprise that high frequency traders themselves have mounted a defence against the reforms. What's of more concern is that in the days preceding the vote the UK Government lobbied for them to be watered-down. Its official response did not support the call for HFT firms to hold equities for a minimum period.

Yet as the Bureau for Investigative Journalism revealed last week, of a 31-member panel tasked by the UK Government to assess Mifid II, 22 members were from the financial services, 16 linked to the HFT industry. A study by the Bureau last year revealed that over half the funding for the Conservative Party came from the financial sector, 27 per cent coming from hedge funds, financiers and private equity firms. This perhaps helps explain how the interests of a select group of traders get confused with the interests of the economy as a whole.

It's a similar story for the Financial Transaction Tax. No longer a pipe dream, European Governments of all political hues, including its largest economies, are working towards its implementation by next year. The tax of between 0.1 - 0.01 per cent on financial transactions offers a more effective mechanism to limit market excesses by making certain speculative trades less profitable. But crucially, it is also capable of raising billions in much needed revenue that would ensure the financial sector pays it fair share for the damage caused to our economy.

Yet the UK Government has again chosen to stand apart in blocking a Europe wide-FTT, turning down billions in desperately needed revenue that could help save jobs, protect the poorest and avoid the worst in cuts to public services. Instead, advice of previous Party Treasurers Michael Spencer and Peter Cruddas was heeded, who infamously lobbied against the FTT. Both incidentally own multi-million pound financial firms which would be hit by such a tax.

Taken together, this tells the story of a post-financial crisis Europe: as governments embark on the arduous task of making markets once again work in the interests of society, the UK Government remains intoxicated by the Square Mile - protecting vested interests and relying on the same market principles that got us into this mess to get us out again. Best brace ourselves for a bumpy ride.

The EU Parliament. Photograph: Getty Images

Simon Chouffot is a spokesperson for the Robin Hood Tax campaign and writes on the role of the financial sector in our society.

Getty Images.
Show Hide image

PMQs review: George Osborne is improving but Angela Eagle gives Labour MPs cause for cheer

The shadow first secretary of state revelled in the Tories' splits. 

For months, Labour MPs have despaired at their party's failure to exploit the Tories' visceral EU divisions. But at today's PMQs, Angela Eagle gave them cause for cheer. Facing George Osborne in her capacity as shadow first secretary of state (David Cameron is attending the G7 in Japan), she brandished Iain Duncan Smith's description of him as "Pinocchio". "Who does the Chancellor think the public shoud listen to," she dryly remarked, "his former cabinet colleague or the leader of Britain's trade unions?" Eagle later roused the House by noting the scarcity of Brexiters on the frontbench. Her questions were too broad to pin Osborne down, and she struggled to match the impact of her first performance - but it was a more than adequate outing.

After recent reversals, the Chancellor delivered a ruthlessly efficient, if somewhat charmless, performance. When Eagle punched his Google bruise (following the police raid on the company's French offices), Osborne shot back: "She seems to forget that she was the Exchequer Secretary in the last government, so perhaps when she stands up she can tells us whether she ever raised with the Inland Revenue the tax affairs of Google?" 

He riled Labour MPs by describing the party as anti-Trident (though not yet announced, Corbyn will grant a free vote), a mark of how the Conservative leadership intends to use the issue to reunify the party post-referendum. "We look forward to the vote on Trident and he should get on with it," Eagle sharply retorted at the start of the session. But Osborne inevitably had more ammunition: "While she's sitting here, the leader od the Labour Party is sitting at home wondering whether to impeach the former leader of the Labour Party for war crimes." He compared Labour MPs to prisoners on "day release". And he gleefully quoted from Jon Cruddas's inquiry: "In their own report this week, Labour's Future, surprisingly long, they say 'they are becoming increasingly irrelevant to the working people of Britain."

The muted response from the Tory benches demonstrated how badly the EU vote has severed the party. But Osborne will be satisfied to have avoided any gaffes or hostages to fortunes. His performance today, his best to date at PMQs, was a reminder of why he is down but not yet out. 

George Eaton is political editor of the New Statesman.