By Max Lawson
What connects hunger in Africa, people dying for want of medicines or health care and fast-paced global capitalism? A small tax on financial transactions.
A new report about computer-driven high frequency trading (HFT), compiled by supporters of the Robin Hood tax campaign, reveals a niche world of millions of transactions each day. The report highlights how HFT threatens a new financial crisis. Driven by computers and their "algorithmic trading", this activity is divorced from real-world fundamentals and is raising risk in alarming ways. It increases volatility and drives up prices, whether of shares or, increasingly, commodities such as oil or food. The Bank of England has identified high frequency trading as a serious systemic risk.
HFT is a rapidly growing phenomenon, and now accounts for over 70% of the UK equities market. Gone are the days of serious investors looking at a company's prospects and plans and making a long-term investment. Now we have firms in the US boasting that the longest they hold a stock for is 11 seconds.
These millions of trades all rely on ultra-thin margins, meaning that one key way to reduce their number is a small tax on each transaction. Martin Wheatley, the incoming head of the new Financial Conduct Authority, is a supporter. Writing in the Financial Times, he has suggested that "the charge could be tiny – a fraction of a percentage point. This financial 'grit' would reduce the profit margin and hence limit the scope of HFT". Lord Turner, head of the Financial Services Authority, agrees.
The readiness of Chancellor Merkel and President Sarkozy to propose a transaction tax at European level is a significant boost. Their finance ministers are meeting on Tuesday to discuss the details of the September proposal. President Sarkozy, as G20 president, has said he believes the revenue raised from such a tax should help fight poverty and climate change. A thousand economists agree with him.
The announcement was greeted by the usual derision from the City and its supporters. City AM and the Adam Smith Institute once again attacked the idea, citing a failed attempt in Sweden many years ago.
But the UK already has one of the biggest routine transaction taxes in the world, the stamp duty, and raises £4bn a year. This is a 0.5% tax on all transactions in UK shares, and has been in place since 1694. The US does not have an equivalent tax, yet it has not led to an exodus of trading. Crucially, the Swedish attempt at an FTT had a deeply flawed design which would be easy to avoid.
If the stamp duty were extended to derivatives instruments, it could raise a further £3bn. The IMF has also been clear that this tax will fall on the richest in society.
Critics were also quick to claim the tax would lead to an exodus of business away from London. But traders cannot even afford to be a few hundred metres away. Exchanges are renting out the buildings next door to them to the highest bidder, as the milliseconds saved by being next door, and not five streets away, can mean making more money.
In a recent editorial, the Financial Times said: "such threats [to leave the UK] should be faced down, not just because they are unreasonable but because they are of questionable credibility". The Economist highlighted bankers returning to London because they found Geneva too boring.
The time is ripe for this tax, but nothing is guaranteed. France and Germany need to make a concerted effort to build a coalition of willing countries in Europe and the G20 in the next two months. Brazil, South Africa and Korea all have some form of FTT already in place, and are obvious allies. Robin Hood tax campaigners are now active in over 40 countries. They need to keep up the pressure to ensure both that the tax happens and, critically, that the funds raised are directed at helping poor people at home and abroad.
The UK government would be wise to help ensure this FTT is one they can work with and sign up to. The French G20 is in Cannes – what better place to see Robin Hood on a red carpet hand in hand with David Cameron?
• Max Lawson is head of policy and advocacy at Oxfam
