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?