What Senator Sanders is suggesting here is a financial transactions tax, sometimes called a "Robin Hood Tax" or a "TobinTax," after the Nobel laureate James Tobin, who proposed a tax on currency trading back in the 1970s.
Being a computer nerd, a guy getting paid to design network computer, a person who's worked on massively parallel servers used by folks like Wall Street traders in the past, etc. I will sprinkle some actual technical information in here. That's necessary, because it's absolutely frickin' amazing how much of what happens on Wall Street is done by AIs.. it's all over in a fraction of a second, and the people involved just look at the result.
The magnitude of this tax, proposed by Bernie, is very small.Mostly small enough to not even notice in a typical consumer transaction -- but how many of those do you do every year. If you're seen the classic film "Office Space", this is kind of like the hack they did in their banking software.
But if you're using computers and making a hundred transactions per second based on massive computers and private analysis algorithms, the extra tax makes each decision more expensive. So it will, more than likely, slow that whole thing down. Which is not what Wall Street wants.
Why Have This Tax?
The argument for it is pretty easy to make. Simply put, most sectors of the economy have inherent taxes, but the Financial Sector has been pretty successful in preventing taxation, even though financial trading contributes nothing to the larger economy. So for one, a small tax on financial transactions would generate some tax revenue for all of this property exchange.
That makes sense. I'm trying to sell my house right now... I'd love to be able to sell it without paying a transaction tax, but I can't. I have a nice house -- it's currently listed at $420,000 (934 Route 40, Monroeville, NJ 08343 | MLS #6734765 | Zillow). But most kinds of financial transactions aside from subsistence items incur some kind of tax. Wall Street speculation is the exception, not the rule.
There's also the original argument made by Tobin. Tobin was initially looking at currency trading.. one could move a huge amount of money from one currency to another, that very transaction possibly increasing the value of the target currency, only to trade back after the rise. The addition of the tax would tend to stabilize this or any high-speed financial transaction. Not just Tobin.. many economists, including John Maynard Keynes, Joseph Stiglitz and Lawrence Summers, have recommended similar taxes as a way to stabilize the economy.
Why Not Have This Tax?
The simple answer: Wall Street likes making money. Lots and lots of money. If there's a transaction tax, they'll make 0.5% or whatever less money per transaction. And this shifts their thinking.
Tobin's math was all done back in the 70s, before computers got serious about financial work. The big financial traders on Wall Street have been spending millions on custom supercomputers, faster networking, etc. to be able to get their transactions in fast, maximizing profits and getting their trades into volatile markets before automated trading gets shut down. They can easily adapt to this tax, but one of the main factors in today's calculations is that, if you're on Wall Street (eg, directly there, no broker), there's no inherent cost in transactions. Make that expensive and that makes some tiny trades unprofitable.
And let's get a little perspective on this. Spread, Inc. spent $300 million to build a dedicated fiber optic network between Chicago and New York. Traders spend as much as $300,000 per month to use this network, which can go from Chicago to New York in 6.6ms. In 2010, the Financial Industry spend about $2 billion on this kind of infrastructure, pretty much all of it oriented toward making faster trades. There's at least one company that built a dedicated transatlantic fiber optic cable, New York to London, for about $400 million. This shaves about 6ms off the speed they get using the most expensive external networking services... and they expected to pay for it in a year or two, depending on how the market went.
Most New York traders are located in New York, but they spend tens of thousands per month to locate their automated transaction servers closer to the exchange. Some of these can make trades in under 500us. And that's just what had been made public. A few companies have developed dedicated rooftop RF links, point-to-point, that could cut that to below 50us.
Does time matter that much? Well , consider the "Flash Crash" in May of 2010. In just one minute, shares of the consulting firm Accenture traded at both $0.01 and $30. During a few minutes, $1 trillion was obliterated in the market, though after they shut off the computers, it rebounded. And that was six years ago.. so today, expect that same thing to happen in 1/4 second.
Some argue this will destabilize trading. I think that's possible, but only the very short term, as Well Street adapts to the changes. They will, quickly, and the net effect will be an overall increase in the financial stability of US markets and some tax yield. It's impossible to say just how much, because the new rule will absolutely shift the number of trades done per day. Opponents also claim this will not yield much money because it will have a drastic effect on trading. Countries have the implemented similar taxes so far have not seen that happen. But part of my point -- reduced trading both adds to stability and increases the chance that small investors will be able to compete.
But It Won't Work
There is absolutely a claim that, if the US puts in a transaction tax, traders will simply move to other locales to make the same trade in a market that doesn't have transaction taxes. But they miss a couple important points.
First is simply that many trading markets would absolutely love to implement a transaction tax. Europe is seldom called out as an example of low taxation against the USA. Right now, they can't because the USA is the center of the financial world. If we implement a transaction tax, they can too, without penalty. Some European countries already have a transaction tax on very short transactions. Not for building the tax base, but for stability.
Second is the technology. A New York trader could absolutely move their transaction from New York to London. But until you build an ansible radio, it takes an absolute minimum of 18.6ms to send a transaction to London -- in actual current technology, it's about 30ms... maybe 1000x slower than doing in in New York with the best of today's tech. Slow trades might try that, but no one doing high speed trades would even consider taking on an extra 29ms.
Bottom Line
At it's best, this has another effect -- it pushed the Market back toward Investment. Keep in mind, the original point of the stock market was investment. A person would buy a piece of a company, that company would make money, the investor would be rewarded. And sure, that still happens today.
But much of the market has shifted to trading. Essentially, working the system. If you have a supercomputer that can predict market trends before or more accurately than the next guy's can, you can make lots of money. But that does not mean that this behavior needs to be part of Wall Street's social contract with the rest of the country. Our best economy is one that balances the what's best for business, finance, and the individual. Anarchy is no plan.
Read other answers by Dave Haynie on Quora:
- Is Bernie Sanders going to step out of the Democratic primaries?
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Do Sanders' supporters really trust the US government to manage single-payer healthcare?
- If Bernie Sanders receives the Democratic nomination, would that affect President Obama endorsing him because he is a socialist?
from Quora http://ift.tt/1TUD293
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