Ritchie\’s ideas on the FX market.

At the heart of R. Murphy\’s ideas about the financial transactions tax is the thought that the tax will widen margins in the foreign exchange (forex/FX) business, well, actually all markets. Wider margins will lead to lower liquidity and thus lower profits for banks and thus lower pay for bankers.

This is one of the source documents he uses to reach that conclusion. The IFSL 2009 September newsletter/report.

From 2001 to 2007, spreads in foreign exchange
markets contracted, meaning banks were making less margin. Spreads have
widened since the start of the credit crisis, due to increased volatility, a fall in
the number of dealer desks and increased concerns about counterparty risk.
This has resulted in boosting global banks’ revenue from foreign exchange
dealing.

No, really, that\’s one of his source documents. Lower liquidity *raises* the amount that banks make from such trading. Yet Ritchie assumes that such wider margins as a result of lower liquidity will *decrease* the amount made and thus put pressure on bankers incomes.

It takes a special talent to entirely reverse the logic of your sources really.

2 comments on “Ritchie\’s ideas on the FX market.

  1. Tim,

    have you seen this: http://timharford.com/2010/02/if-that%E2%80%99s-the-robin-hood-tax-i%E2%80%99m-the-sheriff-of-nottingham/

    “There isn’t much evidence as to whether transaction charges reduce volatility. What there is is mixed – but perhaps leaning against the Robin Hood tax. On the French stock market, coarser “tick sizes” raise spreads and act like a tax: they increase volatility. Transaction taxes on Swedish stocks in the 1980s reduced prices and turnover but left volatility unchanged.”

    I liked his sign off as well:

    “I haven’t forgotten the ultimate aim of raising money for the very poor. It’s a cause I continue to support politically and personally. But the Robin Hood campaigners have dented my confidence that they should be trusted with my cash. Money isn’t enough: we must also care about what works. Do they? “

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