High Frequency Piketty: Is There a Fiscal Sociology of HFT?
May 7, 2014
What happens when High Frequency Trading is thought of as a tax? And, if at all a tax, what type of a tax is it?
These are two questions that arise from recent discussions on the regulation of HFT in Europe and North America. They are, furthermore, critical for understanding the public politics of financial markets in contemporary societies. As fiscal sociologists argue, investigations into tax regimes are telling about the political structures of society: what, upon who, and how levies are enacted reflects both the capacity and logic through which states exert control over the economy as well as some of the cultural cleavages that structure distributional and welfare policies in society. How we tax is how we distribute, so the question of just how taxing HFT is bears directly on broader issues concerning the distributional character of financial markets. (Do bear with me: this is a very tentative provocation).
An example of HFT as an admittedly peculiar fiscal device was recently presented in Michael Lewis’ Flash Boys. The problem with HFT, Lewis notes, is that is it a tax: in a telling passage in his book, Lewis recalls a calculation performed by one of the characters in his story aimed at estimating the impact of HFT on the costs of trading in today’s markets. As Lewis agues, HFT increases trading costs by a tenth of 1%, constituting
a tax on capital; it’s the toll paid by both the people who have it and the people who put it to productive use. Reduce the tax and the rest of the economy benefits.
Comparing HFT to a tax rather than, for instance, an operational overhead is intriguing: the increased trading costs implied by Lewis are clearly not taxes in any conventional sense (they are not, in particular, levied by the state or its proxies). Indeed, in a first reading it may seem that characterizing HFT as a form of taxation is primarily a politically oriented metaphor.
However peculiar and counterfactual it may be, this metaphor is not only prominent (in both Lewis’ and other market participants’ accounts): it is also telling. There is a sense in which HFT is clearly ‘taxing’ over the market: within the small world of finance, it is a toll, whether symbolic or economic, paid by those wishing to use the efficient price system of modern electronic stock markets.
So what happens when we take the metaphor at face value and read HFT as a tax? What arises from thinking in these terms? I can think of two themes highlighted by this perspective and which signal important transformations in how markets are coupled to broader social and political structures. Thinking about these questions not only sheds light on whether HFT is fair or not. More importantly, perhaps, it provides insights into the changing roles of financial markets in recent times.
The first theme concerns the location of markets within the broad historical division between public and private spheres. Consider, here, Bill Maurer’s work on the evolution of payment systems: whereas traditional payment infrastructures worked like ‘free’ public highways (maintained by a tax levied on all), newer payment systems operate more like private channels within which tolls are charged. Critically, the move in fiscal governance was from the public to the private, with shared levies and collective institutions transformed into individual tolls and their enforcers.
It could be said that something similar has happened in finance and that such shift is at the core of HFT’s rise and reception: from a certain standpoint, stock exchanges today are ‘less public’ than those from the past. The charges once levied on the market by the owners of relatively central and mutualized exchanges, for instance, have been replaced by a diverse payment structure commanded by many privatized organizations (few stock exchanges today are member organizations: they are, mostly, publicly traded companies). Within this ecology, HFT would be but one of the tolls that, while putatively equivalent to those charged by market makers before it, fall within a private realm of activity and regulation. The question, then, is one of legitimacy: can private tolls be publicly acceptable? This is likely a contentious point that underlies the debate on HFT but is not unique to it—think, for instance, of broader contemporaneous transformations in the fiscal state, and think too of the increased regulatory delegation of state capacities on private entities. The discussion on the legitimacy of these quasi-taxes is, perhaps, but an avatar of a larger and more profound transformation of modern states in the West.
This leads to a second observation. While HFT may be a toll imposed by private agents on the market, it is by no means the only taxing burden in the system: as noted in an earlier post, the bonuses of Wall Street dwarf the size of HFT activity, and these are themselves but a fraction of the costs of intermediation involved in maintaining global financial markets (granted, only part of Wall Street’s income if related to secondary equities markets; this, however, still surpasses the HFT industry by at least an order of magnitude). Thus, HFT is but one within a plethora of ‘taxes’.
And here comes the (pseudo)Piketty moment: if a toll, HFT is perhaps the most progressive, redistributive tax of the financial system (though it is nowhere near the high global wealth tax that Piketty has in mind). It is, perhaps, a small, though meaningful, break on inequality. Why? Think of the following: while the costs of HFT are theoretically a flat rate on every transaction in the market, they are more likely to affect users whose strategies depend on large trading volumes. HFT taxes volume and frequency of trade: it is a tax on transactional density. The investors requiring such strategies are not the typical mom-and-pop shops in Peoria or larger long-term, buy-and-hold value investors. For both of these, a 0.1% tax is notable yet, for all intents and purposes, practically insignificant. HFT is a tax, rather, for larger institutional investors that require frequent changes to their portfolios. It is a tax on activity. Thus, in its own peculiar manner, HFT is as progressive a tax as an endogenous market cost can be.
But in its own peculiar way, and within the small worlds of finance, HFT may also have interesting redistributive effects. Although uncorroborated (this is something that admittedly requires further work), there is evidence suggesting that the firms involved in HFT are socially and organizationally distant from more traditional types of market intermediaries (which is a sense conveyed by Lewis and others in the industry). In a sense, HFT is taxing the latter and providing income to the former, it is a tax on the incumbents by the challengers. This is all, of course, merely suggestive. But it points, perhaps, at an interesting confluence between the sociotechnical concerns of the social studies of finance and the political sensitivities of fiscal sociology. To tax or not to tax? That is simply not the question. The questions are, rather, what, upon who, and how.