Ritchie gets worse

The major cost of trading in this market, which is largely undertaken between a very limited range of banks –
often, as noted on a pure inter-bank basis – or with a limited range of large commercial counterparties
operating what are, in effect, their own in house banks usually called treasury departments, is labour. Those
employed in this sector are relatively small in number and often very highly remunerated: the exact target of
many recent policies seeking to curtail excessive pay in the banking sector. If there are smaller volumes of
transactions and smaller profits made as a result both the number employed in the activity and the average
pay of those remaining in it are likely to fall to compensate for two things: firstly reduced volumes and
secondly the fact that out of margins on the remaining trades undertaken a tax of up to (on the basis
estimated here) one third of the margin might be paid. The impact of a fall in value and volume of 25%
followed by the loss of margin out of the remaining trade of up to 33% means that in combination cost
reductions of up to 50% will be required in this sector.

He thinks that a transaction tax will reduce margins.

Umm, no, we think that a transaction tax will, as he notes himself, reduce volumes. Liquidity. We know what happens when liquidity dries up in a market. Margins rise. In fact, we know what used to be true in financial markets when there was less liqudity. Margins were higher.

We think that more competition reduces margins….less competition means higher margins. Competition and liquidity are pretty much the same thing.

Jebus, and the TUC are proposing to change the taxation of the world\’s financial system on the basis of this gibbering?

What\’s worse, he entirely garbles the tax incidence argument. As and when margins increase then all those still trading such things pay more for their trading. And the more they pay for their trading is the incidence of the tax. It\’s bugger all to do with bankers getting lower pay.

I seriously and really don\’t believe it. Adam Lent must be horrified (assuming he\’s understood the point). Murphy has entirely garbled the tax incidence argument, so much so that this paper should generate loud guffaws among the economists who read it. And they\’ve paid Ritchie money to do this.

Really not the TUC\’s proudest hour. They had a technical paper written for them by someone who does not understand the technical issues he\’s writing about.

7 comments on “Ritchie gets worse

  1. I think I agree with your analysis.

    If they want to reduce bankers’ pay (not that I think they should be meddling in such affairs anyway) then the way to do would be to increase the replaceability of the bankers. That means reducing the barriers to entry, in other words less tax and regulation.

    Raising costs throughout the board just means they all put their prices up by the same amount so their margins stay the same. If demand drops then its more likely they’ll sack some lower salaried staff rather than those at the top.

  2. The capacity for the recovery of the financial transaction tax charges
    arising from out of current remuneration considered excessive by policy makers and governments worldwide
    is sufficient to ensure that the combination of falls in the numbers employed and the pay of the remaining
    engaged in activities some have described as ‘socially useless’ will mean that the incidence of these financial
    transaction taxes will fall almost entirely on a relatively small group of bank employees in a fashion consistent
    with government economic, social and regulatory policy.
    © Tax Research LLP 2010.

    Apart from the mangled and mangling language and syntax in evidence, this rates as one of the vilest examples of the Green Eyed Monster I have come across since the ’70’s; the last time the TUC felt able to unleash it’s naked class/money envy. So much for the protection of the working class – sack’em and reduce their hard earned. Remarkably like naked capitalism, really.

  3. Who are you calling conservative? I may be many things but that ain’t one of them.

    T. Worstall -Liberal Conspiracy

    You trying to get in with the Liberal Conspirators Tim ?A kind of , hey we all hate the Conservatives shtick ? Shameless hussy ,well if you are not a Conservative god knows what you were doing with UKIP who are more Conservative than me.

    On this post, it does seem a little odd to assume any outome in a “Market” which rewards simple work quite so highly involves no risk and often seems to produce little net value. Its not good enough to say imagine a world without banks then.

  4. newmania….explain yourself…as Tim points out it is the fact that so much speculation happens that means that the end result approximates to the mean. In a Ritchie world you would have big winners and bid losers and no volume. In a Tim world you have lots of small winners and lots of small losers…if you get it all right you win a lot…and vice versa

  5. It seems to me that for you to make the assumption that a reduction in volume must cause an increase in margins you must assume the market was somewhere near to a perfect one in the first place when that would certainly be true . Also that the market is operating in a normal way over the range you are effecting
    Now the banking system gives every appearance of paratsizing the rest of us in a manner I would compare to religious orders in their worst days . Take the trade in ‘Indulgences ’ which relied on what was by today’s standards a literal reading of doctrine but as real to the buyer as the efficacy of a hugely complicated disguise for bets on slums
    If you were to tax them would this reduce the trade and thereby increase margins for the fewer players ? No it would not because the right wall that predominate in this non market is the amount the punters can pay . Indulgences would continue to be sold by anyone who got the coveted licence to in as large number as possible and if they got a little less fat there is plenty of slack.

    You see in this example there is no entry to the market , no real value to the product . Well…….

  6. Newmania: the purpose of a stock exchange is to provide liquidity, i.e. to connect willing buyers with willing sellers. Introducing costs to trading has a frictional effect, and that always widens margins. High-volume stocks are low margin. Low-volume stocks are high margin. You don’t need to be a strict adherent of the EMH to know this. You just need to see trading patterns (which I do, every day.)

    Besides, Murphy’s such a catastrophic idiot that he has no idea of the ratio between trading volume and returns to the brokers. In FOREX, trades are almost frictionless. That’s what enables them to be such high volume (like half a quadrillion dollars a year). The man is such a desperate cretin that he explicitly wants to throw sand in the gears – to reduce efficiency. Arbitrageurs the world over must be toasting him in Bollinger Grand Année.

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