11 members of the Eurozone today received the go-ahead to apply a financial transactions tax to trades of stocks and derivatives that occur within their countries. The EU’s tax commissioner called it “a milestone for EU tax policy“:

EU ministers have given the go ahead for 11 eurozone members, including France and Germany, to prepare a new financial transactions tax. [...]

The tax – also known as a Tobin tax after the economist who originally came up with it 40 years ago – is expected to be charged at a rate of 0.1% of the value of any trade in shares or bonds, and 0.01% of any financial derivative contract.

Although the tax is not being adopted by the UK, which already charges its own 0.5% stamp duty on trading in shares, it will nonetheless have to be paid by investors trading on the London Stock Exchange who are based in one of the 11 countries.

The other nine going ahead with the tax are Spain, Portugal, Italy, Belgium, Austria, Slovakia, Slovenia, Greece and Estonia.

As former Labor Secretary Robert Reich tweeted, “Most of Europe will now tax financial transactions, generating billions for hard-pressed budgets. U.S. should do same.” It’s unclear how much revenue Europe will raise, but the European Commission “had previously estimated that such a tax across the 27-nation bloc could yield €57 billion a year,” while “the 11 nations pushing ahead represent about two-thirds of the EU’s economy.”

Here in the U.S., lawmakers have unsuccessfully tried to implement a financial transactions tax in the aftermath of the 2008 financial crisis. The benefits of such a tax are two-fold. First, it would raise billions of dollars to repair a federal budget that expanded in the wake of a recession caused in large part by Wall Street malfeasance, thus making the financial sector repay for the damage it caused. Second, it would slow down some of the high-frequency trading that has exploded in recent years, bringing more stability and safety to financial markets.

Last year, a group of 52 financial executives, including several former heads of mega-banks JP Morgan and Goldman Sachs, endorsed the idea. Forty countries around the world have already embraced a transactions tax.

Several European countries have announced their intention to implement a financial transactions tax — a small fee on stock trades meant to raise revenue and slow down some of the high-frequency trading that has come come to dominate world markets. Some U.S. lawmakers have proposed doing the same here, but the idea has gained little traction.

That, however, has not prevented U.S. banks from freaking out about the possibility that Europe will go it alone:

The U.S. financial industry is growing increasingly concerned that a European push to establish a tax on financial transactions could end up on American shores.

The group of investment and business lobbies warned Treasury Secretary Timothy Geithner on Tuesday that while they appreciated the Obama administration’s “sensible” opposition to such a tax, a growing movement in Europe to impose one could throw fragile markets off kilter. [...]

The letter was signed by the Securities Industry and Financial Markets Association, the Financial Services Roundtable, the U.S. Chamber of Commerce and the Investment Company Institute.

A transactions tax, in addition to raising much needed revenue without causing economic damage, would throw some sand in the gears of high-frequency traders. Even one of high-speed trading’s pioneers has admitted that such activity does nothing for the economy: “We are competing at milliseconds,” he said. “And whether you can shave three milliseconds of an order, has absolutely no social value.” 52 financial industry experts, including several former executives at the nation’s biggest banks, said in a letter that a transactions tax “will rebalance financial markets away from a short-term trading mentality that has contributed to instability in our financial markets.”

The growth of high-frequency trading is beginning to catch the attention of federal regulators at the Securities and Exchange Commission as criticism mounts that the U.S. is far behind the curve when it comes to monitoring and regulating a computer trading industry that has added threatening levels of volatility to financial markets.

That explosion has caught the attention of leaders in the financial industry too, after high-frequency trading caused multiple “flash crashes” that sent stocks plummeting. The growth of high-speed trading, as well as the potential damage it can cause, is “terrifying,” one chief executive told the Wall Street Journal:

“It’s terrifying,” said Mark Gorton, chief executive of Tower Research Capital LLC, which is among the biggest high-frequency trading businesses in the U.S. Tower uses complex computer programs to trade stocks, currencies and other securities at speeds measured in fractions of a second. Such firms have come to account for the majority of trades in the U.S. stock market and are expanding in trading of foreign currencies, commodities and fixed income.

“Everyone’s sitting there saying, ‘This could happen to me’ ” said Mr. Gorton.

Gorton isn’t the only person within the industry to express concern. Last month, one of high-frequency trading’s pioneers said that the current explosion contains “absolutely no social value.” It’s been two years since officials at the Federal Reserve Bank of Chicago warned regulators that high-speed trading was becoming increasingly dangerous.

Other countries, like Germany, have moved to curb high-speed trading, and lawmakers in the U.S. have proposed a financial transactions tax that would limit the number of computer trades by making them more costly. The SEC, though, is only “planning to catch up” with other countries, and it held meetings in Washington today to assess how it could better regulate the practice.

Two years ago, the Federal Reserve of Chicago warned the Securities and Exchange Commission about the dangers high-frequency trading posed to financial markets and the overall economy, but SEC regulators have been slow to move on reforms and rules that would limit the practice, according to a Reuters report.

High-frequency trading has caused multiple damaging “flash crashes” in the two years since, and the SEC has instituted small reforms aimed at mitigating the damage. But it is still dragging its feet on large-scale proposals by the Chicago Fed and other proponents of limiting the practice, Reuters noted:

The Chicago Fed said exchanges and other trading platforms should install more risk controls, even if it slowed down trading, including a “kill switch” at the trader workstation level. “The competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response,” the Chicago Fed’s then Financial Markets Group Senior Vice President David Marshall said in the submission. [...]

And still the move towards reforms has been slow.

Proponents of limiting high-frequency trading include Thomas Peterffy, the man who pioneered computer-based high speed trading in the 1980s. In an interview with NPR’s Planet Money, Peterffy said the speed of today’s trading, which earns traders and firms millions of dollars in revenue by speeding up their ability to make transactions, “has absolutely no social value.” And still, with little oversight from regulators, high-frequency trading has exploded, as this chart from the market research firm Nanex shows:

Germany last week became the first country to make an explicit move toward limiting high-speed trading when its lawmakers approved draft legislation that would require licensing of all trades and limit the number of overall trades made at high-frequency. In the United States, Democratic lawmakers have proposed a return of the financial transactions tax, which would limit trading by levying a small tax on transactions. Such a plan would generate billions of dollars in revenue each year, according to Rep. Peter DeFazio (D-OR), while limiting the market volatility and sudden crashes that occur when high-frequency trades go wrong.

Thomas Peterffy, who pioneered the computer-based high-frequency trading that generates millions of dollars in profits for big banks, said in an interview with NPR’s Planet Money that speed trading has gotten so fast that it now “has absolutely no social value”:

Peterffy says automation has done some very good things for the world. It’s made buying and selling stocks much much cheaper for everyone.

But Peterffy thinks the race for speed is doing more harm than good now. “We are competing at milliseconds,” he says. “And whether you can shave three milliseconds of an order, has absolutely no social value.”

When Peterffy first began using computers to trade, high-speed trading was rare. Now, as the Huffington Post noted, it makes up more than half of the stock market’s volume. This interactive chart from Nanex, a markets research firm, shows how high-speed trading has exploded:

Tho address this problem, Peterffy told NPR that a regulatory structure that slows down trading is necessary. Though he didn’t mention it specifically, one way to achieve that goal would be a financial transactions tax, a small levy on trades that would slow down markets while barely affecting normal traders. The European Union has considered a transactions tax in the wake of the financial crisis, and Rep. Peter DeFazio (D-OR) and Sen. Tom Harkin (D-IA) have proposed one here in the U.S.

That tax could raise $35 billion annually, according to DeFazio, but more importantly it would remove volatility from the markets and make the entire financial system safer. Cries from industry insiders that a transactions tax would hurt economic growth, DeFazio told ThinkProgress earlier this year, are simply false. “For 50 years we had a tax that was about seven times larger than this when the country was seeing the greatest growth in its history, post-World War II,” he said. “So we’ve proven this will not have a detrimental impact on growth. In fact, it perhaps is beneficial to growth. It’s not necessarily beneficial to salaries of hedge fund managers on Wall Street.”

This chart from the markets research firm Nanex shows the absolute explosion in high-frequency trading that has occurred over the last few years. This sort of trading, employed by large global firms like Goldman Sachs, allows for the churning up of quick profits, but with little economic benefit:

As Reuters’ Felix Salmon noted, “The stock market is clearly more dangerous than it was in 2007, with much greater tail risk; meanwhile, in return for facing that danger, society as a whole has received precious little utility.” This makes the case for a financial transactions tax, a small tax levied on stock trades that, while barely affecting normal traders, would hopefully slow down unproductive churning in the markets.

As Center for Economic and Policy Research Director Dean Baker wrote, “if a financial transactions tax reduces the volume of trading, and therefore the resources used by [the financial] sector, without harming the sector’s ability to allocate capital, then it will be making the sector more efficient and freeing up resources for more productive uses.” This summer, Rep. Peter DeFazio (D-OR) and Sen. Tom Harkin (D-IA) introduced legislation to establish a transactions tax.