Volatile Financial Markets and the Speculator

Abstract

In recent years it has become fashionable to argue for a tax on financial transactions in order to reduce the volatility of financial markets. In the USA, however, the volatility of the New York and American Stock Exchanges has declined, relative to that of the over-the-counter market, since the reduction in commissions. We argue here that what one expects from putting 'sand in the wheels' of financial activity depends upon how one explains the existence of speculative activity and that this depends upon whether or not one accepts the ergodic principle. We also argue that it is bandwagon effects and not white noise variance that causes problems in financial markets and that the solution for this must involve the creation of a market maker prepared to 'lean into the wind' when markets show signs of departing from fundamentals.