The high frequency trading tax

An unfortunate calculation here, forgetting that while there are costs to everything there are also benefits to everything:

High-frequency traders earn nearly $5 billion on global equity markets a year, creating a “tax on market liquidity”, according to a report by the City watchdog.

The first part of this being that there are costs to doing high frequency trading. The profits of the sector are not that $5 billion.

The Financial Conduct Authority (FCA) found that “latency arbitrage” races - when traders profit from reacting more swiftly to financial information than their rivals - take five to 10 millionths of a second, occur once a minute for FTSE 100 stocks and account for about a fifth of the overall trading volume.

The report said the practice leads to “a never-ending arms race for speed, to be ever-so-slightly faster to react to new public information”, which harms investors.

Rather more importantly, to call it a tax on liquidity is more than a little odd. For HFT provides more liquidity to the market. They are, after all, that fifth of trading volume. What does more liquidity mean? A smaller spread between buy and sell prices. That is, the market maker tax is diminished.

As it happens, at least coincident with the rise of HFT that market maker tax, that spread, has fallen by at least 99% in recent decades. For most large stocks it is, for the retail investor, now nothing.

There’s a reason why economists insist on a cost benefit analysis. Because we do need to know the both before we try decide upon the desirability or not of some thing.