News and Commentary
In a new report at American Compass, Oren Cass writes about his “pro-market agenda for financial reform.” He begins by describing what he claims to be the three major allocation problems in the financial market: capital, talent, and risk. He then provides three primary solutions to these issues. His first solution is to align risk and reward by ensuring that employees are paid first in the event of firm bankruptcy and eliminating the deductibility of interest in the tax code in order to place “debt and equity financing on equal footing.” Next, he recommends policies to make information more accessible by requiring transparency in performance benchmarks, caps on fees, and public releases of annual performance information. Finally, he suggests policies to reduce “financial engineering.” These include an economic activity test to prevent “speculative mechanisms for placing leveraged bets and SPAClike cash grabs for deployment at a later date,” banning buybacks, and imposing a financial transactions tax of 10 basis points.
New Research
In a new NBER paper, Matteo Aquilina, Eric Budish, and Peter O’Neill “use stock exchange message data to quantify the negative aspect of high-frequency trading, known as ‘latency arbitrage.’” Their results suggest that “latency arbitrage imposes a roughly 0.5 basis point tax on trading, that market designs that eliminate latency arbitrage would reduce the market’s cost of liquidity by 17%, and that the total sums at stake are on the order of $5 billion per year in global equity markets alone.
In a column in VoxEU, Timo Löyttyniemi discusses how climate change risks can be integrated into the financial stability framework. These risks include flawed mitigation policy, malinvestments, discounted pricing, and imperfect metrics.
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