On Thursday, Hillary Clinton released a lengthy policy proposal for how she would handle Wall Street if elected. The document makes space for an idea that seemed too radical just a few years ago — taking on a powerful financial force and even threatening to jail those who engage in behavior that collapses the American economy. It has many progressives highly encouraged, especially given her long-running ties to Wall Street, but there’s one aspect of the proposal that has some progressive economists wondering exactly how far the former Senator and Secretary of State would go.
Clinton is proposing a tax on high-frequency trading (HFT), the computerized financial business model that has enabled a small number of people who are very smart with computers and mathematics to turn very small price differentials into improbably large profits. It’s an aspect of Wall Street made famous by Michael Lewis’ Flash Boys. These mathletes, affectionately nicknamed “quants,” operate in a variety of different ways that tend to destabilize markets. That’s driven lawmakers to call for a Financial Transactions Tax (FTT) to curb the computers’ influence on markets.
Now, Clinton is joining that chorus –- but only part of the way. “The growth of high-frequency trading (HFT) has unnecessarily burdened our markets and enabled unfair and abusive trading,” the campaign’s policy paper reads. “That’s why Clinton would impose a tax targeted specifically at harmful HFT.”
What exactly is Hillary Clinton trying to do?
But her proposal is very narrowly targeted to one specific practice, in which a trading computer tells a marketplace that it’s going to make a large number of trades but then cancels them before they go through. The false orders cause the prices of the stocks or commodities involved to shift, allowing the computer to cash in a profit with real transactions following the canceled ones.
All other forms of HFT would be free to continue as normal under the proposal. Such an approach contrasts with broader, simpler FTT proposals from both congressional progressives and current primary opponents like Vermont Sen. Bernie Sanders and former Maryland Gov. Martin O’Malley.
Clinton’s attempt at precisely targeting “harmful HFT” and leaving the rest of these computer-driven trading practices untouched worries experts. For one thing, Clinton’s “very vague plan” would likely be easy for Wall Street’s quants to sidestep, Center for Economic and Policy Research director of domestic policy Nicole Woo said in an interview.
“Targeting cancellations would be complicated. There would be ways to evade it,” Woo said, potentially by allowing computerized trading algorithms to modify orders instead of canceling them, or changing the rules of a given trading platform such that trading activity that has the same manipulative effect on market prices would sit outside Clinton’s narrow definition of harmful trading activity.
“That’s why a lot of folks think a broad-based FTT is more elegant, effective, and simple,” said Woo.
The idea is too narrow, experts say.
Center on Budget and Policy Priorities senior fellow Jared Bernstein agreed, calling Clinton’s approach “much too small.”
“Such a narrow base is just begging the quant jocks to write a clever algorithm to outfox it,” Bernstein told ThinkProgress. “Good idea, glad she’s taking a step in that direction, but the base is way too narrow.”
On top of rendering the whole tax avoidable for savvy traders, Bernstein said, Clinton’s narrow proposal would mean the tax doesn’t raise any real revenue. That only exacerbates the political difficulties inherent to getting the idea through Congress.
“I could see a rationale for some exemptions [from a broad-based FTT], but once you start chipping away at the base you’re asking for trouble, especially in this town,” Bernstein said. “The legislative lift here is going to be so hard that you might as well go for a broader base.”
Previous legislative proposals for taxing trades were projected to raise tens of billions of dollars. Sanders has said he’d direct the spoils of a full-bore FTT to making college free for all Americans. Other versions would use the money to finance an infrastructure bank to direct capital to the trillions of dollars’ worth of rebuilding the nation’s roads, bridges, and rail systems require.
“The other reason you’re hearing about FTTs is because we need revenue. And that’s another critique of Secretary Clinton’s idea, because it won’t really raise anything,” Bernstein said. “It’s more about shutting down this specific area of HFT where you launch all kinds of orders just to cancel them.” The Clinton campaign has acknowledged that the proposal is specifically intended to quell price manipulation and would not raise revenue for the government. A campaign spokesperson did not return requests for comment.
Is there such a thing as harmless high-frequency trading?
Absent further details on Clinton’s proposal, it’s hard to divine much deeper insight into her views on the role quants, computers, and digitally-enhanced avarice are affecting the real-world economy. But by singling out “harmful HFT,” her proposal suggests there is such a thing as harmless or even virtuous forms of computerized hyper-fast trading.
Some do argue that HFT is valuable in these social terms, and not just a lucrative manipulation of the capital markets that extracts wealth without benefiting everyone else. The idea is that all that trading volume generated by computers keeps overall capital markets operating smoothly.
“Some of that stuff creates liquidity, which is just a way of saying it facilitates buyers finding sellers in a more efficient way,” Bernstein said. “So it’s not all bad.”
But as academics have dug deeper into the actual performance of HFT models in relation to the broader marketplace, Woo noted, that liquidity argument has shriveled.
“There’s a growing body of research that shows this is a sort of ‘ghost liquidity,’” said Woo. “It’s there in times when things are good and smooth, but then as soon as there’s a blip, the algorithms tend to just suck the liquidity right out of the system at exactly the time we need people to keep trading.” It’s this proclivity for tightening up and exacerbating market friction that has led regulators to blame HFTs for bizarre and frightening market moments like the “flash crash” of 2010.
If the liquidity argument is flawed, then so is the idea that HFT computers provide any social value in exchange for allowing their human masters to get very rich. Some of the most successful people in the financial markets certainly don’t see any value to the high-tech, high-speed profiteering.
In the words of Charlie Munger, the long-time investing consigliere to Warren Buffett, HFT is “the functional equivalent of letting a lot of rats into a granary.”