Transparency is cheaper than a Tobin Tax

As we continue to grapple with fallout from the global economic crisis of 2008, markets face disturbances on the regulatory front. The push for stricter rules to govern markets is neither unusual nor unexpected following such a crisis. Yet regulators in some jurisdictions are being particularly aggressive – and some of the rules they’re proposing could do more harm than good.

One example is the Financial Transaction Tax (FTT) being proposed by some members of the European Union. Research firm Oliver Wyman recently postulated that this so-called Tobin tax could increase FX trading costs by 9% to 18% which would force the market to bear a huge burden. This would almost certainly reduce liquidity – further driving up costs through wider bid/ask spreads – and increase volatility.

Cost makes the case for full transparency

Rather than taxing FX transactions to discourage excessive speculation, we at OANDA believe a more effective, less costly solution is to impose full transparency. There should be a rule that requires every transaction executed by a broker, bank, hedge fund, or other firm dealing in financial markets to be published online.

A public record of transaction data would allow interested parties to view this information and potentially spot troublesome patterns in advance of another disaster. Members of the research and media communities could analyse the information and draw conclusions about different banks and brokers. Regulators, economic think tanks, and university researchers could crunch the data and investigate any warning signals.

Imagine if the firms bailed out by various governments following the 2008 crash had been forced to publish their transactions online. Had people actually seen the instruments they were trading and the sizes of the positions, members of the asset management, press, or academic communities would probably have raised red flags. The crisis may have been averted.

It would cost almost nothing for a broker like OANDA and our competitors to simply, once a day, publish a page with every transaction that gets executed. The client name would not be disclosed, just the trade information: currency pair, ticket size, price, and time stamp. Everyone could see this information – including the clients themselves, who can then ask, “Am I being treated fairly? Is something going wrong?”

Full transparency would help the markets self-regulate at barely any cost. It would be a simple regulatory rule that would provide tremendous advantages.