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I am reading Flash Boys by Michael Lewis, and I am very confused by one passage.

On page 52 in my copy, they mentioned that their investment let them escape taxes. I am utterly confused how that works and what they really mean here:

"[T]hey bought 10 million shares of Citigroup, then trading at roughly $4 per share, and saved $29,000 — or less than a tenth of 1 per- cent of the total price. “That was the tax,” said Rob Park. It sounded small until you realized that the average daily volume in the U.S. stock market was $225 billion. The same tax rate applied to that sum came to more than $160 million a day."

You can find the the full page here.

What is going on?

  • They don't mean a government "tax". In English the word "tax" I sometimes used to mean, a cost you have to pay. – Fattie Nov 5 '18 at 3:21
  • Note that the excellent sister site "English Learners" is excellent for this sort of thing. – Fattie Nov 5 '18 at 3:21
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At the top of page 50 it states:

Someone out there was using the fact that stock market orders arrived at different times at different exchanges to front-run orders from one market to another.

Their program built in delays so that orders reached the exchanges at the same time. On pages 51-52:

But now there was a tool for gauging not just how orders reached their destination but how much money this Wall Street intermediation was removing from the pockets of investors large and small: Thor.

Brad explained to Mike Gitlin how his team had placed big trades to measure how much more cheaply they bought stock when they removed the ability of the machine to front-run them. For instance, they bought 10 million shares of Citigroup, then trading at roughly $4 per share, and saved $29,000 - or less than a tenth of 1 percent of the total price. "That was the tax" said Brad Park.

It's a metaphorical statement. They are likening the High Frequency scalp to a tax.

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The "tax" in this case is not a normal government tax, but a metaphorical "tax" collected by high-frequency traders who were front-running the protagonists' orders.

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It doesn't mean a tax to the government.

They mean that when they studied what was really happening with front running, they discovered that the front running systems were costing them money. They were costing everybody money. That 1/10th of 1% didn't seem like much but over time it was huge. It was like a tax becasue everybody paid it without even knowing it. It was sort of like the cost of doing business. They then set out to try and stop it.

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From the page before your quote, continuing to just before your quote (emphasis, mine):

Why was Citadel willing to pay so much to see the flow? No one could say with certainty.

It had been hard to measure the cost of the new market structure. But now there was a tool for gauging not just how orders reached their destination but also how much money this new Wall Street intermediation machine was removing from the pockets of investors large and small: Thor.

In this context, it would be natural to understand the 'tax' as referring to the amount removed "from the pockets of investors". It's a metonymy that takes the usual definition for "tax" in the context of a type of fee paid to the government, and applies it to a fee paid to an organization.

Note that although the term tax is understandable in this context, it is the context that 'licenses' the usage. It isn't a standard term (yet) for such usage, so if you ask your stock broker, point blank, how much tax is to be paid on a particular transaction, they would probably think you were referring to amounts paid to the government.

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    +1 for using metonymy (a word I have never come across) – Bob Baerker Nov 5 '18 at 4:05

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