Currently, at the top of the New York Times bestseller list in non-fiction is Michael Lewis’ Flashboys; a detailed look at how the high-frequency computerized trading of stocks allowed sophisticated programmers to beat top institutional investors to trades and pocket millions. Lewis tells the story as a detective story, with a Royal Bank of Canada trader Brad Katsuyama as its protagonist, uncovering why his trades got delayed. While many reviews have focused on the need to better regulate the stock market to insure its fairness, less attention has been paid to a big reveal of the book.
What Katsuyama uncovers is the reason his trades were delayed, or that he sometimes could not complete trades, was because a set of high-frequency traders used millisecond differences in when trade orders arrived at stock exchanges to buy, or sell, stocks ahead of Katsuyama’s orders. The difference cost Katsuyama less than 0.1% of his trade. That appears to be a small amount. It is in the range of what people are advocating for a Financial Transaction Tax (FTT)—a tax to be collected on every trade of stocks, bonds and derivatives.
The knock on the FTT is that it would disrupt the markets, because even that small fraction would deter profitable trades; and make the markets less efficient. Some say, it would really hit big institutional investors—pension funds, charged with protecting the retirement earnings of millions of workers. But Lewis’ book points out that Wall Street has already been paying this fee. It turns out it is only going to a small band of high tech shops that spring up to skim this money out of Wall Street. And, more importantly, until Katsuyama got curious, while many others noticed something strange happening, no one was doing anything about it.
Now, you may wonder, what would be the big deal about a tax of less than 0.1% of stock transactions? Here is the punch line: As Lewis points out, each day about $250 billion changes hands in U.S. stock markets, so we are talking about $160 million a day. That skimming was going into private hands, unnoticed. But what if it were taxes?
For the rest of us, if that tax had been collected, then today the position of the U.S. government in navigating the hardships placed by the Great Recession on American families and workers would be very different. That revenue could be dedicated to cover the costs of financial collapses, which we see are huge. And, the fiscal policy space for the government to bail out Main Street would be there. Instead, today, we languish with 300,000 fewer teachers for our children, because we are told the federal government has to worry about deficits. And, rather than take action to restore investment in needed public infrastructure to get people back to work and our roads and ports ready for renewed growth, House Republicans are holding up unemployment checks arguing that helping those hurt by this Recession is wasteful and public investments too expensive.
This stalemate between Republicans, who wish to argue about deficits, and President Obama who has advanced a plan for public infrastructure investment could be avoided by the presence of the FTT. The Congressional Budget Office figures the US economy is over $1.9 trillion short of where it would be if we had full employment and our factories were at capacity. And, they have revised the view of the longer term, permanently downsizing what our economy could produce—in short making the problem of unemployment easier to solve by assuming fewer people will be working. These are the costs Main Street is being asked to absorb.
If we are to accept the notion that Wall Street’s recklessness is the price of higher growth, then we must also require Wall Street to insurance against their failures. Now, Wall Street can be reckless, get all the gains, and leave us with all the bills. There is no excuse for evading the FTT. Wall Street absorbed the fee when it went to a tiny cabal of ruthless traders, they can absorb it when it goes to insure the American people.
Dr. William E. Spriggs is the chief economist for the AFL-CIO.