" Are you under the mistaken assumptions that volatility is caused by the number of transactions? "
Darn good question! Actually, I'm not sure what causes volatility. However, I strongly suspect it is from large numbers of people all thinking they are smarter about markets than most other people when actually they are about average. This results in the huge market volumes we see today when coupled with computers.
What is your idea concerning the cause of volatility? I like to consider everything when it comes to markets.
If everyone instantly knew everything about the markets then there would be no volatility at all. Every time a new piece of information were revealed it's impact would be instantly known, and the assets effected by it would all instantly be revalued. All markets would look like a chart of Chinese currency prices with long flat patches interrupted by momentary revaluations. So in effect it is the cost of doing business (or to quote Thomas Sowell the "Cost of Information") which allows for diversity of opinion among investors and thereby contributes to volatility.
But in some respects it is caused by people who think they are smarter than the market. There is a concept called an "Information cascade" which my current work is focused on. This is a big contributor to market vol in my opinion.
Either way however, a 'transaction tax' wouldn't lower volatility, and in fact might actually amplify it. I'm also at a loss to see how a transaction tax might have prevented the long term capital issue which was caused by a credit contraction not by volatility. But I'm open to hearing explanations.
I can tell you. Market volatility is caused by traders buying high and selling low. They do this when they bought with either erroneous information, or inadequate smarts. In this wonderful information age erroneous info can be more and more easily rechecked. OTOH, inadequate smarts is either solved by the de-incentive of loosing money, or (in the case of really dumb buyers) going broke and going back to work as financial advisors.
These problems are both solving themselves and don't need an omnipotent government solution of (as usual) more taxes. Buy looking at fluctuations over the long term and more recent times, the trend is toward less and less volitility.
All this is pretty much argument by definition. Then again, if you don't agree with my take I interested in your thoughts.
