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Indybay Feature
Prohibiting Micro-Second Betting on the Exchanges
by Urs Gascha, Marc Chesney & Thomas Bieger
Monday Apr 9th, 2018 4:14 AM
The financial sector that has gone off course should serve the real economy again in the future. The exchange functions like a gigantic casino with the difference that a casino is more transparent and is easier to understand. Throwing some sand in the gears with a transactions tax would slow down the speculation. Only opening the exchanges two days a week would be better.

Dangerous casino intrigues financed by financial management

By Urs P. Gasche

[This article published on October 13, 2016, is translated from the German on the Internet,]

"The financial markets would be better served without this computer trading," the financial correspondent Krim Delko wrote in the Neue Zurich Zeitung newspaper on October 11, 2016. Two years ago, Franca Contratto, assistant professor for financial market law at the University of Zurich, estimated micro-second or high-frequency trading in the US already involved more than half of all stock sales and over a quarter in Switzerland."

The NZZ describes the process of the so-called "Algo-trader" (algorithm-trader) under the title "Computer trade damages the market." "The Algo-trader applies computer models to financial instruments so their strategies are carried out within milliseconds. They are so extremely dependent on the speed of trade that they put their servers near the computers on the digital market place to accelerate the data transfer."

Algo-traders recently contributed to the so-called "Flash Crash" of the British pound when the currency suddenly lost more than six percent in the middle of the night. Surprisingly, only a few blamed Algo-traders, the NZZ correspondent said, and "no one emphasized their presence and danger for the financial markets."

The useless casino intrigue endangers the real economy and not only the financial markets. However, our middle-class majority in parliament whose parties (SVP, FDP, and CVP) are jointly financed by financial management does not intervene. Independent financial managers have long demanded prohibiting micro-second speculation. This speculation has no benefit for the real economy. Infosperber reported on 5/15/2015: "The financial casino is useless."

Setting the stock prices daily would be enough

"The financial management that has gone off course should serve the real economy again in the future," Marc Chesney, professor of quantitative finance at the University of Zurich, urges. In November 2012, he proposed with other authors in Le Monde abolishing the micro-second trade on the exchanges and setting stock prices only one time a day or week through supply and demand.

Wirtschaftsblatt: "Revolutionary proposal"

The Austrian economist and critic of neoliberalism Stephan Schulmeister did exactly the same thing as Chesney in the "Wirtschaftsblatt" journal. He sought to stop the "fast trade occurring in micro-seconds on all financial markets and in electronic securities."

Auctions could occur every two hours. This already happens with the opening quotations.

The "whole trading madness" falls away if stock prices are only set every two hours. Before the auction, the traders grapple with the true value of a stock in its purchasing or selling price. These are "the conditions for genuine market efficiency" at "zero cost."

Marc Chesney has the same opinion. Abolishing micro-second speculation "will not cost businesses, taxpayers, or the state anything." Financial management would only be deprived of casino activity and must concentrate on its function, being a financial offerer and mediator for industry, the service branch, and consumers.

The Austrian "Wirtschaftsblatt" journal describes Schulmeister's proposal as "revolutionary." "The fraud should become unattractive and more capital should flow into investments for the real economy."

Only advantages for the real economy

Whether the price determination on the exchanges occurs every two hours or only once daily is not crucial. Financial management with its high-risk potential for the whole economy would promote the well-being of the real economy with the abolition of automated micro-second speculation.

Despite the cheap money, businesses hardly invest anymore today but sink their money on the financial markets because they earn more there, Schulmeister criticizes. Companies invest too little in the real economy and too much in financial ventures. "Every capitalist system must go to ruin" in this constellation.

In "Le Monde," Chesney quotes the American broker Thomas Peterfly who helped introduce electronic trading on the "American Stock Exchange" and later declared: "The exchange functions like a gigantic casino with the difference that a casino is more transparent and is easier to understand."

As further advantages of graduated stock prices, Chesney sees that money laundering and tax fraud would be more difficult and fewer toxic financial securities would be created. These toxic securities contributed to the great financial crisis in 2008.

Taxing micro-second speculation would be better

The excesses of the financial casino could be contained with a financial transactions tax or a more extensive micro-tax on the whole payment process. A micro-tax on securities or all financial transactions would help and not damage the real economy – with a simultaneous lowering of income- and business taxes.

Stephan Schulmeister developed the concept of a general financial transactions tax. However, he has abandoned hope that it could come in the foreseeable future.

Professor Chesney would also prefer such a micro-tax. "A tax on all electronic payments would be a genuine source of revenue for the most heavily indebted states," Chesney writes in his book "From Great War to Permanent Crisis." He speaks of a tax on "all electronic payments" since a "capital transactions tax" often only means a tax on exchange transactions.

Such a comprehensive "micro-tax on all electronic payments" could

replace nearly all existing taxes;

would have the advantage of markedly limiting tax fraud and tax evasion;

would not damage the real economy;

would curb the unproductive micro-second betting of big banks and hedge funds with derivatives, financial products, stocks, and currencies.

This idea came originally from Zurich financial manager Felix Bolliger.

"Powerful lobbies undermine reform proposals"

Still, Chesney has no illusions about an immediate introduction of a micro-tax. Big banks, hedge funds and the mammoth accounting firms KPMG, Ernst & Young, Price Waterhouse Cooper and Deloitte would fight such a tax. "Powerful lobbyists are at work, manipulate public opinion and undermine reform efforts," says Marc Chesney, professor for "quantitative finance" at the University of Zurich.

"Micro-second betting is an act of violence to force us to fulfill the will of the financial markets."
Beda Duggelin: From Wars to the Financial Markets," 2016

"Only disadvantages arise to the majority of people from high-frequency trading. Therefore, high-frequency trading should be abolished. The argument is always: we can do nothing because the others do not act. This hinders us from acting. As a simple action, I have no pleasure in bailing out fraudulent banks with tax money…

Throwing some sand in the gears with a transactions tax would slow down this speculation and restrain the fraudsters somewhat.

Only opening the exchanges two days a week would be better…"


Finance professor Marc Chesney holds debt cuts as inevitable and advocates a micro-tax on financial transactions

[This article published on August 28, 2017 is translated from the German on the Internet,]

Europe in the crisis mode was sequestered by a group of unelected, faceless bureaucrats in the interest of big money and no longer governed by elected politicians.

To calm the population, the financial industry swore again and again that a repetition of the system-threatening events of 2007/2008 was impossible. Despairingly, people sought an answer to the all-decisive question behind closed doors: how and through whom can the system be kept alive that was bailed out in 1998 by a group of banks and in 2008 by the intervention of states?

“Bail-in” Rescue

The answer worked out by the financial experts was replacing the bail-out by a bail-in. If the governments intervened in the last crisis to bail-out the financial businesses with tax funds, the shareholders and depositors of the threatened financial institutes should be consulted in the next crisis to compensate for their bail-in. In no time, the concept was declared the law in nearly all countries of the world and sold to the public by politics as “relief of the taxpayer.”

• However, the bail-in principle showed its real face in its direct application in Cyprus and Italy. Expropriation struck the owners of small and medium assets – who already bore the highest tax burden – since the wealthy either stow away their riches in tax havens or withdrew their riches on account of good relations to government circles.

• A proposal brought into play by the IMF in October 2013 in its brochure “Taxing Times” also aimed at rescuing the system through partial dispossession of citizens. According to this proposal, the empty state treasuries should be filled by a one-time, 25-percent tax on all available wealth. Even this extreme proposal left unconsidered the tax paradise of the well-to-do and shifted the total burden to small and medium-size subjects.

• Both the bail-in and the one-time tax are nothing but the attempt drafted on the drawing board to have the middle class pay for the rescue of the system. The authors did not consider the social consequences of their plans. When four banks were rescued by a bail-in in the Italian Toskana in December 2015, the cold expropriation of simple citizens fueled the hatred of the population for the overpowering banks and the government so strongly that an extremely dangerous social climate arose. The cabinet in Rome and the Italian financial sector fell under pressure so intensely that they roundly rejected another bail-in urged by the European Central Bank and the European Union.

Charter for Central Banks

A new stage of the crisis was reached with the provisional failure of the bail-in principle and the insight that a one-time tax would meet the embittered resistance of the population. The financial industry and politics must admit their possibilities of crisis management were largely exhausted. Since the time pressed, the authorities of the central banks were expanded beyond all legal restrictions and a charter for system-maintaining measures was issued to them.

This stopgap or provisional arrangement has become a permanent solution. The global financial system depends on the central banks without whom it would perish. The result is a new normality. Printing money that was really only intended for emergencies has become routine. Interest-rates have already fallen below zero into the negative. Repayment of credits is extended to thirty or forty years. Enormous amounts of government bonds, business loans and even stocks are purchased – enabling states and businesses to afford compound interests on a constantly growing mountain of debts.

The System has become More Fragile

No end of this manipulation can be seen after more than $10 trillion flowed into the system in the first ten years after the 2007/2008 crisis and whole states are kept artificially alive alongside banks, insurances, and mammoth corporations. Manipulation has become a firm component of the system. The system depends on manipulation for its survival. The whole global financial structure has become so fragile that every large market correction (that earlier was part of the normal economic ups and downs) had to be avoided. The huge mountain of debts is larger than ever before. The realm of derivatives is uncontrolled and therefore ungovernable and can have unforeseeable consequences with every collapse of the markets.

We have entered an historical phase in which there is only still movement because every stronger downward movement could bring down the whole system. At the same time, the global debts have surpassed the point of repayment possibility. The two means of money creation and lowering interests have been largely used up. For that reason, we are headed inexorably to the point where the financial tsunami will be triggered. Are there other possibilities for delaying this tsunami?


Are sporadic stock crashes system-immanent with all their social and political dislocations?

Interview with Thomas Bieger and Marc Chesney

Thomas Bieger regards economic crises as inevitable. Too little is done to avoid them, Marc Chesney replies.

[This interview published on September 14, 2017, is translated from the German on the Internet,]

Journalist: Should economists have foreseen the financial crisis?

Marc Chesney: Figuratively speaking, this is like driving faster and faster with the car despite an ever-thicker fog until an accident occurs. We do not know when it will happen. But we economists had to warn in time of the system risks before the financial crisis. With few exceptions, we did not do this.

How do you see this, Mr. Bieger?

Thomas Mieger: Economic development is marked by regular economic- and financial crises. The Dutch tulip crisis in the 1630s is a famous example. The mechanism is always similar. There is an investment in something – in tulips or in real estate in the US up to 2007. The more the prices rise, the more people invest speculatively with borrowed money in the hope of making enormous fast profits – until the bubble bursts. Obviously, everyone hopes he can bail out in time.

A deeply human phenomenon is behind this. People want to become rich quickly with little effort. Thus the financial crisis of 2007 will not be the last. But it was very great because unrecognized high risks could be taken through new derivative financial products outside the balance sheets.

Chesney: Financial crises are not natural laws. Preventive acts are possible in the financial world, unlike earthquake areas where earthquakes are always possible. The financial crisis was the consequence of an excessive indebtedness and the development of the financial casino that went out of control after the 1999 abolition of the Glass-Steagall law by President Clinton. This law that prescribed the separation of commercial- and investment banks ensured that there were few banking crises between 1933 and 1999. Thus, politicians and economists can counteract financial crises.

Bieger: Yes, there were few bank crises. There were oil- and real estate crises because other objects were "bet" on. On one hand, I see the task of us economists to communicate instruments for the early detention and mastery of crises. On the other hand, we should create orienting knowledge so politicians, managers, and citizens can understand the events. There were economists who warned of the financial crisis but they were hardly heard by the public.

What lessons must economists draw from the financial crisis?

Chesney: The financial crisis was not a purely technical crisis. It is also a crisis of values. I show my students emails of traders like Jerome Kerviel from the Societe Generale that did dubious business for which some of them did time in jail. They lost all values in the course of their careers. In the emails, one compares himself with Frankenstein, another with a prostitute and a third as addicted to money.

As economists, we have the responsibility in our teaching to speak about values and not only about prices.

Are too few values communicated to budding economists, Mr. Bieger?

As a direct reaction to the economic crisis, the University of St. Gallen and other economic universities worldwide have focused on the question what can be improved in teaching and research, for example in the Global Alliance for Management training.

In searching after the causes of system failure, measures on the technical plane are necessary and testing suitable regulations for financial instruments. Inter-disciplinarity occurs on another plane. We must understand the economic chain from human conduct to the markets. For that, an integrative way of thinking that goes beyond the economy is vital… For example, we have trading areas where market situations can be played through. In case studies, students discuss how a certain decision is made in a situation and what would be the consequences if all market actors acted the same way. We discussed what we could learn from the last crisis.

Do you see a need for further actions, Mr. Chesney?

Publications in top economic journals are crucial for an academic career. In the financial realm, these are strongly marked by the Chicago School and its market efficiency hypothesis. Whoever takes a critical view of this school has fewer chances of publishing an article there. As a result, young economists choose themes with more publication chances to advance professionally. An important theme like sustainability does not occur in the leading journals of financial management. Thus, top journals are needed that make possible a greater diversity in themes.

Is free research endangered by the pressure to publish in certain top journals?

Bieger: Different academic communities emphasize publications in top journals. Individual publishing houses are dominant for certain networks. Young researchers cannot avoid publishing where they are seen internationally.

We spoke of reforms of institutions. Must certain theories and models be scrutinized in economics?

Chesney: Yes. Unfortunately, there are many models today with little relation to reality. For example, the assumption that there are low-risk investments with which positive yields can always be realized is hard to justify today. For example, are state bonds low-risk? Their yields are often negative in Switzerland. Occasionally, this was also true in Germany and Japan. We should see what theories and models are still valid and relevant today and to what extent must new concepts be developed. That was not done. Little has changed in today's lectures compared with those of 2006.

Bieger: Let me give another example. The assumption was always more money with lower interests would be available for spending and consumption would consequently rise. However, the savings rate actually increased in several countries with negative interests. One behavioral hypothesis is that people realize negative interests have effects on their old age provisions and they must save more to make up for the losses. Therefore, a way of looking at things overarching the disciplines is important for examining economic models that take people into account.

After the financial crisis, economics was emphasized for neglecting to develop models for sustainable growth. Is this theme addressed today?

Chesney: I do not know any lecture in economics that seriously grapples with the question whether growth is unconditionally describable for the whole population. Growth at any price seems to be a dogma. Growth criticism is largely taboo. There are too many economic models that are uncoupled from resource consumption. We must question the striving for growth and try to develop new models.

Bieger: The concept of sustainable growth in which no non-renewable resources are consumed comes to the fore today. The concept is also broadly anchored in research. Sustainability is researched in several institutes like the Institute for Economic Ecology.

Is growth criticism something for our affluent society?

Chesney: Yes. More is better for whoever must survive with less than two dollars per day as is the case for countless people worldwide. We should at least reflect about the nature of growth and develop other paradigms.

Has economics learned enough from the financial crisis?

Chesney: No, incentives to draw lessons from the financial crisis are lacking.

Bieger: I am convinced we have drawn the necessary lessons from the past financial crisis. What worries me is that after the crisis in the past was always before the crisis and that we do not know where the next problem will arise.
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