Simple solution. Penny a share transfer tax for all trades. Corresponding amounts on bonds and other instruments. Watch the amazing reduction in volume and volatility. Then watch the return to focus on value trading.
Like that idea? Next, open up public companies books. Not in the formal but phony SEC/GAAP way. No, I mean realtime journal entries. I will do the accounting myself. You can too. Link the trading tax to how often the company updates its numbers. Want more liquidity for your stock? Give more information.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Now all those things would make finance productive again by putting the focus back on capital allocation and moving it away from trading, speculation and lies. Make regulators focus on enforcing real transparency, since they don't know how to regulate behavior. This takes away the upside from the regulator/industry revolving door. It would be a great world for analysts and investors.
In olden days (1980) all this would have been technically infeasible. Now we have the computing power to handle it.
What's a "share"? Equities are one of many financial markets, but not the only one and not necessarily the most important. People trade bonds, treasuries, foreign currencies, commodities, interest rates and various derivatives on top of these securities: equity options, FX options, interest rate swap options, FX forwards, etc., etc. How would you tax options contracts? Tax when exercised? But you wanted it to be a trade tax, so should it be a dollar per standard contract?
Your model is too simple and does not reflect the reality of the financial markets. And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Why do companies have to have "a model"? You wouldn't ask da Vinci for the "code" behind the Mona Lisa; why should accounting be automatically less creative than painting? All regulations will do is force companies to get money from source other than a public offering -- private investment, bond issues, etc.
Anyway, I'm not saying that taxing trades is a bad idea, I'm saying that your idea doesn't make much sense in the real world. Communism is a good idea. On paper.
My example tax is only a conversation starter. You would be right to say that the reality is a little more complex. But not much. I worked in the bond, fx, and commodities end of Wall Street for nearly 20 years and an average guy from my old department would know how to set, implement and administer such a tax for each product. It's not that hard. In fact a similar system existed for regulatory capital for a very long time.
The Communism comparison is really a red herring. The principles of the price system, the central feature of a free market, are under constant assault from informational asymmetries and externalities of all kinds. Before our era of jargon, they were simply called fraud and rumor mongering. HFT is 21st century micro-rumor mongering.
To protect the functioning of markets these are appropriate objects of regulation--even for a free marketeer like me. I merely suggest we modify the the regulation of an already regulated market.
Unfortunately the style of regulation we keep opting for punishes bad behavior of individuals--when it does anything at all--and ignores the systemic causes. This repeatedly plays into the hands of industry interests every time. The public interest requires more information, to reduce the tendency for fraud that our regulators have proven they cannot control.
"And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire."
While I agree with the rest of your criticisms, this is off base. You have to consider the second-order effects; banks will not simply continue to trade at the exact same volume as before whatever (presumably somehow fixed-up) tax is imposed, then pass the costs on to hapless consumers who have no choice but to just fork over the cash. They will have to trade less. Which is the point; however good or bad it may be, at least the core idea is making some account of second-order effects. When you tax a thing, you get less of it.
(My specific opinion is that it isn't necessarily a net gain as written, it is after all just an HN comment, but that the general idea of carefully re-inserting some friction back into the market as a damping factor may be a useful line of inquiry. But it's not going to be easy.)
I think he means that if you force every company into the same financial mold, you're not going to get anything interesting in the public markets. Anyone outside the box will not play in the public arena because the rules will be so restrictive as to be unworkable.
Most people think of accounting as being like math. It's more like writing.
Why can't your "gut" be involved in forecasting the success of your company? People often come up with the right answer without knowing how; making them write down every assumption they made while coming up with an answer would make coming up with an answer impossible.
People often come up with the wrong answer without knowing how, too. They just forget about those times.
It's been well documented— your perception of the "real world" is heavily distorted. That's why we have math— to figure out the right answer despite human biases.
Just forcing a company to say "We expect X amount of growth in the next financial quarter, and the reason we expect this amount of growth is - even though we are an international financial corporation - guesswork and gut feeling, rather than any kind of formal model" would be a step forward.
You have two companies. Both predict X growth. One provides a full model which backs up their prediction. The other flat-out states that they made the number up. Which would you pick? It doesn't actually matter - the point is that their operations are more transparent and your choice is more informed.
It's been a while sine I felt comfortable discussing the details of accounting, but sometimes the need to classify things gets in the way of the truth. Do you capitalize a cost or expense it? Often you can argeue both sides of the coin, but ultimately, you're forced to choose.
The quantitative nature of accounting masks a nuanced and imprecise language meant to help communicate the overall financial story of a company. It's not like physics where there is a right and wrong answer.
You could use "creative" methods of describing and classifying transactions that aid in telling an accurate story (as defined by who?). You can also twist the truth. But there is no set of rules you can universally follow that will result in The Answer.
While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.
I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.
Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.
Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?
* What you originally bought it for?
* What you could buy that exact model year for today? From whom?
* What you could buy a similar car for today?
* What you could sell it for? To whom? In how much time?
And that's for something as tangible as a car, listed on the market with easily searched prices. This is a simple example, but I recall that some types of assets (land?) are valued at their original purchase price, which is far deflated from the current market value.
I think of accounting similar to benchmark tools for software -- it's all about what you want to measure, and depending on assumptions you have some wiggle room.
Good points but I think the answer is to pick one (I'd vote #4 but I'm open to debate) and enforce it at a regulatory level. Issues arise when you're allowed to change how you value assets based on what's most favorable at the time.
Ah... but if you do that, you'll be forcing companies to pick an arbitrary measure, regardless of how well it describes the underlying economics. The goal of accounting is description, not conformance.
As a practical matter, this would require the enforcement agency to publish the correct price for every asset regulated.
Publishing a formula for this calculation wouldn't be good enough, because then you would be required to value things based on the formula and that leads you back to...accounting.
Think about assets. What is the worth of your car, your house, your furniture, etc.? E.g. the car cost 20k initially, after two years of use, you discount 20%, so you put 16k into your books. Is that objective? Essentially, you have to predict the money-out and there is happing a lot between money-in and money-out.
I think their point is that you don't put the car on the books as worth anything. Instead you declare you own it and someone else can decide what they think it is worth. Anything that requires interpretation would be up for discussion.
Re "penny a share transfer tax", the UK already does this, it's called the "stamp tax." Unfortunately, they exempted a few large institutions from the tax, so everyone trades derivative instruments managed by these institutions who don't pay the tax. You only pay the tax if you're stupid.
A penny per share tax would price small investors out of the market. If there were a penny per share tax then corporations would reverse split their shares so that a penny is nothing relative to the share price of their equity. I don't think you really want all stock to be as expensive as Berkshire Hathaway.
How many shares do you think small investors buy at a time?
If I buy 30 shares of Broadcom @ 32.00 on ETrade (their commission is $9.99), my total price goes from 969.99 to 970.29. If BRCM reverses 30:1, I save $0.29?
I'd think large companies would rather see the price stay affordable. BRK.A/B is a totally different animal.
To curb high frequency trading, a dollar per transaction would also work. For large trades, this would be neglegible, but if you're doing tens of thousands of them a day, it would add up.
Another idea (sans - or in addition to a tax) to improve the signal / noise ratio of the markets: mandate that all B/Os put out there have a TTL of 5 seconds or until they are hit.
So if you Bid at X, you can't pull that bid 10 microseconds later. You can't quote stuff / probe with orders you never expect to get hit. You can't create the appearance of 'market depth' where none exists at all.
I think the spirit of your idea of a per transaction tax on financial products is a good one. I would balance the increase in government revenue with a reduction in tax on capital gains held more than 5 years as Cuban suggests.
Trying to understand a company's finances from its internal books is foolhardy unless the company volunteers to train you up to the standards of its own accountants. Protecting investors from the idiosyncratic and often misleading nature of a company's internal books is the entire reason for GAAP's existence in the first place.
Actually I am suggesting something more innovative (radical/extreme?) to companies. Toss away those GAAP crutches, and confess to the congregation all your transactions--realtime. Enter the kingdom of Real Transparency (TM).
I don't need your accountants, only your auditors. Imagine for a minute what that would do to the business of financial analysis. It would add real value, unlike today.
This idea is interesting, but you still need to figure out how to account for those transactions. In today's system of accounting a transaction can take many different forms with radical implications:
For example:
Company A sells product to Company B.
When is cash exchanged? When is the product delivered? How much interest if any is part of the transaction? etc.
What may be required to implement your idea would be to create a new system of accounting that has more depth than traditional accounting (Accrual Accounting).
*Also, what is "business of financial analysis"? There is no such business. There are many businesses that implement financial analysis, and all of them add value to the economy and to their clients, investors etc.
Transparency doesn't mean anything if you're just looking at a stream of symbols that have no standardized meaning. Companies can make anything look good through creative terminology when they aren't held to strict standards such as GAAP. Internal books kept to internal standards simply aren't helpful to people who aren't privy to the processes by which they're kept, even if you deliver the transactions at 21st-century speed through a 21st-century firehose.
The meaning of a transaction is generally understood. All I am saying is anything that would merit a journal entry gets feed through pipe instead of consolidated and reported months (or years!) later. I will do my own accounting, you can too.
I like the concept, but I don't think we have enough people who are capable of doing the work. Those that are would have a tremendous advantage. Why would they share with the public?
You have to be really careful with such taxes. Take for instance India: the Indian government places a tax on the exercise of any option. This doesn't stop HFT at all - it simply makes it more favorable to trade out of a position before exercise. My guess is it mostly hurts the business owner/investor trying to hedge risk.
Likewise, a fee on a stock trade would probably have little effect on banks like GS, etc. I imagine it would instead discourage trading through public exchanges and widen spreads - all things that are bad for the little guy.
In a similar spirit, allow automated trading to take place, but only if the code and underlying data sets is open sourced after 5 (or 10?) years.
If you need manual intervention (i.e. gut estimates) to feed into the automated trade, it must be logged, and will be made publicly available at the same time as the code. There will also be a lag of 1 second.
As a carrot, servers with logged code can be co-located with the exchange, for a small fee. As a stick, anything outside the exchange gets the 1 second lag.
Noone should benefit from sabotaging a company. It's way too easy to drive the price of a stock down...the slightest rumor sends them into free fall.
Granted it wouldn't solve much. Wall Street could just as well drive the price of a stock down with a false rumor, then buy up the stock at a discount before it rebounded.
But at the very least, they wouldn't make twice as much on each transaction.
Actually I disagree. Shorts one of the few cures for bubbles that we have and they are weakened greatly by institutional rules that favor promotion over rationality. But, and this is a big one, we would have to reveal trading positions daily to banish all speculation.
Large short ratio is the first sign something is amiss. In an environment with imperfect information, someone knows more than the news on the company press releases page.
I think you're equating short selling with fraudulent market manipulation. Short selling has no soul - flipping the buy-then-sell to sell-then-buy ( that is, shorting ) merely allows the pessimists to place their bets along side the optimists, and the markets are better off for it. A great read on the subject:
Like that idea? Next, open up public companies books. Not in the formal but phony SEC/GAAP way. No, I mean realtime journal entries. I will do the accounting myself. You can too. Link the trading tax to how often the company updates its numbers. Want more liquidity for your stock? Give more information.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Now all those things would make finance productive again by putting the focus back on capital allocation and moving it away from trading, speculation and lies. Make regulators focus on enforcing real transparency, since they don't know how to regulate behavior. This takes away the upside from the regulator/industry revolving door. It would be a great world for analysts and investors.
In olden days (1980) all this would have been technically infeasible. Now we have the computing power to handle it.