Mis-state what we said to prove you\’re right

So, Ritchie tells us that stock market volumes have fallen and the roof hasn\’t fallen in. Thus all of us who chided him over his backing of a financial transactions tax are wrong.

So volume and value have fallen, dramatically.

And has liquidity collapsed as some predicted? No, it hasn’t.

Has the supply of capital to UK large business failed? No, it hasn’t.

Has the world stopped revolving as it seemed some would suggest. No, definitely not.

Because the truth is that this volume of share dealing is simply not needed to create effective markets.

The truth is that effective markets might actually benefit from considerably less dealing. Keynes suggested two trading windows of ten minutes a day might be sufficient. There’s a lot of sense in that. Calm reflection is what is needed for effective markets. We don’t have time for that. A little less liquidity would help no end. And a financial transaction tax might just help create it.

But the thing is that we didn\’t say the roof would fall in if there was an FTT.

What we did say was that an FTT would lead to lower liquidity. Lower liquidity would lead to wider spreads on the market. Thus everyone buying shares (to use shares as the example as Ritchie does) would pay a little more for their shares and everyone selling them would get a little less.

Thus there were two problems with an FTT, both to do with tax incidence. The first is that the economic effects of the tax would be carried by those buying and selling shares: our pension funds, our insurance policies, us going direct.

The second is that dependent upon how much the margins spread out these costs could in fact be higher than the total amount raised: we could have an incidence of greater than 100% of the revenue raised.

Now, to work out whether this is correct (or even likely) we would need to look at what, if any, effect the fall in trading volume has had upon spreads. No, I have no idea, perhaps one of you do?

What was the average spread (perhaps a range of spreads would be better, high-cap, mid-cap, low-cap maybe? If anyone actually collects the stats that way) in 2007 and what is it now in 2010?

When the IFS did look at this with respect to Stamp Duty on share transactions they did find both such incidence and that it was of the order if not higher than the revenue raised. But what we\’d like to know now is whether that is indeed true again?

You know, actually use the real world to test Ritchie\’s theorising.

About the 10 minute thing though….there is one market that works exactly that way. Ten minute trading sessions in each metal (clearly you cannot have only 10 minutes twice a day for trading in thousands upon thousands of different shares, just think of the number of people you would have to have available to enable that to all clear in 10 minutes!) at the London Metal Exchange. So, do we take it then that the LME is the model Ritchie thinks that all markets should follow?

If not, why not?

4 thoughts on “Mis-state what we said to prove you\’re right”

  1. It is curious how when we say ‘this will make things a bit worse’, lefties hear ‘this spells financial doom for Western civilisation’. See also: the minimum wage, which we assert makes employing people that bit harder, and they think we mean that unemployment sky-rockets in minimum wage areas.

  2. OK, this experience is from years ago when the LSE had jobbers (& no women!!!) but the spread was always less the higher the volume traded. In a sense, its an information thing. The more shares traded the more data is available for consideration so the nearer market makers can assess a notional ‘real’ price for a share.
    One problem with a transaction tax is that it would bear down more on heavily traded shares ie the large issue ‘investment’ stocks that end up in pension funds & insurance funds. Conversely, in small issue highly speculative shares where the spreads are larger it would have much less effect.
    Maybe Richie’s a secret gambler?

  3. He appears to be confusing different things. Volume and liquidity are not the same. Outside of the heavily traded companies liquidity is provided by market makers. Whether the market is rising or falling they will profit from the turn. Low volume does not mean no liquidity.

    A FTT must even marginally widen the bid-offer spread. However, it is not certain that it would lower liquidity.

    Two trading windows of ten minutes a day would be a recipe for massive manipulation. Far from introducing calm reflection they would be hugely volatile. There most definitely would be huge spreads because of the fear of asymmetric information.

Leave a Reply

Your email address will not be published. Required fields are marked *