"Here is the gist of my thinking to date on curbing HFT:

"The essence of High Frequency Trading is the ability to buy and sell stocks and other instruments with holding times of microseconds to a few seconds, capturing small profits on each trade and generally front-running (or something so similar it still looks like front-running) the market. By using the fastest computers commercially available, ultra high speed networking, close locality to exchanges, and speed efficient algorithms, this can create a very profitable business, while causing large swings in volatility.

"I propose that we overhaul the US (and other countries) capital gains taxes as related to financial transactions. A new time-tiered structure would replace the current models. The structure would be based on holding time for the instrument:

Time Held Tax Rate
-------------- ------------
< 1 hour.........90%
< 1 day.. ........50%
< 3 months...25%
< 6 months...15%
< 12 months. 5%
> 12 months. zero

"Now one could argue for different time scales for options and futures, and perhaps different rates for futures trading for delivery. One can also, of course, play with the time and rates, but the idea remains the same. Holding periods for short positions would be defined as the time from the sell to the matching purchase, mirroring long positions.

"This would have to apply to all players, including funds, with the possible exception of market makers who would be precluded from HFT by criminal law. Regulating the market makers should not be an insurmountable problem.

"The wild swings in the market, exacerbated by HFT, are seriously spooking the individual investors. Far from enhancing liquidity, HFT, if not stopped, may dramatically reduce long-term liquidity in the markets by driving away individual investors."

David Fuller's view Thank you for this terrific suggestion regarding curbing HFT excesses with a variable CGT scale. As you say, one could vary the time and rates for this tax. In order to halt HFT abuses but not adversely affect normal trading and hedging which does actually increase liquidity, I would front load it much further, proposing a Time Held to Tax Rate of up to 10 seconds, 90% - 30 seconds, 80% - 1 minute, 70% - 10 minutes, 60%, 30 minutes, 50% - and the rest as you suggest or perhaps declining even more quickly.

Re precluding HFT firms from market making, I agree and was alarmed to read some comments suggesting that they should be declared market makers. Talk about putting Dracula in charge of the Blood Bank!