Hillary Clinton Steps Into High-Frequency Debate With Tax Plan


Hillary Clinton greets attendees after speaking at a campaign stop in Davenport, Iowa, on Oct. 6, 2015.

Photographer: Daniel Acker/Bloomberg
  • Presidential candidate plans to tax cancelled trades
  • Critics argue that HFT firms cancel trades to spoof markets

Hillary Clinton is proposing a tax on the flash boys that may be unlike any in the world.

She wants to penalize traders who use super-fast computers to repeatedly submit and then retract their stock orders by charging a fee for transactions they cancel. The proposal, released by her presidential campaign late Wednesday, will gratify critics of high-frequency trading, who’ve long argued that the industry’s reliance on orders that are never executed is a hallmark of unfair markets, and worse, manipulation.

But some academics say her idea shows a misunderstanding of modern markets, will hurt all types of investors and could even rob high-frequency traders of an invaluable defense against real predators.

“For every order the high-frequency traders cancel, they substitute another order that provides liquidity,” said Larry Harris, a former chief economist at the U.S. Securities and Exchange Commission who is now a professor at the University of Southern California’s Marshall School of Business. “Any tax on their trading activity will increase the cost of trading for retail investors and for pensions that serve retirees.”

While a group of European nations have tried to curb rapid buying and selling by proposing a tax on the volume of trades, charging a fee for canceled orders is a new idea. The plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said. She plans to formally propose the tax on Thursday as part of a broader plan to reform financial rules.

In going after high-frequency trading, Clinton is targeting a practice that has drawn increased public skepticism, particularly following the publication of Michael Lewis’s 2014 book “Flash Boys,” in which he accused the firms of rigging markets by front-running the trades of other investors. Meanwhile, regulators are investigating whether high-frequency traders have been allowed to take advantage of other market participants on what are known as dark pools -- off-exchange trading platforms run by banks.

Highlighting high-frequency trading could help differentiate Clinton from Democratic presidential rival Bernard Sanders, the U.S. Senator from Vermont who has won praise from progressives by calling for the break up of big banks such as JPMorgan Chase & Co. and Citigroup Inc. Clinton’s campaign has taken a less critical view of large Wall Street lenders, saying multiple times over the past two weeks that firms like Lehman Brothers Holdings Inc. and insurer American International Group Inc. bear more responsibility for the 2008 financial crisis.

A trade group for high-frequency firms said Clinton’s plan was misguided because it would act as a disincentive for equity traders who make markets by submitting a high level of buy and sell orders every day.

“We are in favor of curtailing irresponsible levels of cancellations,” said
Bill Harts, chief executive officer at Modern Markets Initiative. “However, a tax on liquidity providers is a tax on investors and the very traders who make our markets efficient and cost effective for those average investors.”

Canceled orders are central to an often manipulative strategy known as spoofing, the practice of rapidly submitting fake bids to entice other traders and then withdrawing the orders once prices move in the desired direction. In April, the Justice Department and the Commodity Futures Trading Commission accused London trader Navinder Sarao of spoofing that contributed to the May 2010 flash crash, when close to $1 trillion was briefly erased from the value of U.S. equities.

However, some traders have argued that spoofing is actually a protection against manipulation. John Arnold, a billionaire former hedge fund manager, has said the practice can be used to trick nefarious high-frequency traders, who try to get early notice of orders so they profit by trading ahead of them.

Spoofing aside, Clinton’s tax proposal might unfairly punish firms that are innocently using computer formulas to constantly update the prices at which they offer to buy or sell securities. Automated trading firms say they often cancel orders, because the speed at which stock markets now move makes many quotes irrelevant almost immediately.

Democratic voters are eager to see more details on Clinton’s broader plan to reform financial markets. She also wants to toughen the Volcker Rule, which bans banks from trading with their own capital. Early reactions indicate her ideas won’t pacify progressives, who say she has not been as tough as Sanders or U.S. Senator Elizabeth Warren in holding Wall Street accountable.

“While attempting to appear progressive,” Clinton’s plans will maintain a system in which some banks are perceived as too big to fail, said Cornelius Hurley, director of the Boston University Center for Finance, Law and Policy. “Her latest proposals are more nibbling around the edges.”

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