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The New York Times this week reports that the buzz surrounding Michael Lewis’s new book “Flash Boys” has “revived support in some quarters for a tax on financial transactions, with backers arguing that a tiny surcharge on trades would have many benefits.” Noting that President Obama’s argument against such a tax is that financial firms would inevitably circumvent it, the Times’ editorial board says that translates into: “No politician has the courage to enforce a tax on Wall Street,” at least “until campaign finance reform is a reality.”

Not coincidentally, Obama’s hometown seems to prove this truism. In the course of Pando’s recent investigation into Chicago Mayor Rahm Emanuel (D) and his ties to high-frequency traders like Kenneth Griffin, the link between campaign cash and giveaways to the financial industry was a recurring theme. One of those giveaways, in fact, occurred at the intersection of taxation, technology and financial speculation at various securities exchanges in Chicago.

Before getting to that story, recall that back in 2011, Chicago’s Inspector General issued a report noting that with more than 3 billion stock trades passing through the city, and with the Chicago Mercantile Exchange (CME) now “the largest derivatives exchange in the world,” the city could raise roughly $37 million a year with a tiny $.01 tax on each contract traded. It was a proposal championed by, among others, the Chicago Political Economy Group.

The beauty of the proposal was that if the tax didn’t raise Chicago the projected revenues, that would probably be because the levy at least interfered with – and perhaps slowed down – the high-frequency trading that has been harming regular investors. This might have had a broad positive impact on the larger market, considering that, according to the Wall Street Journal, the CME has been one of the key venues for high-speed trading and its attendant abuses.

Yet, with Emanuel raking in campaign money from Griffin and employees at his high-frequency hedge fund, and with CME being one of Emanuel’s largest donors, politics in Chicago and Illinois ignored the financial transaction tax proposal and moved in exactly the opposite direction. As one firefighter told the Chicago Reader after personally pitching the transaction tax proposal to the mayor: “The idea that you can actually tax these pricks is not something he’s going to do. Better to cut the pensions of retired firefighters.”

Those proposed pension cuts from Emanuel came this year, of course. Before that, though, came the tax giveaways of 2011. That year, CME publicly defended high-speed trading and Emanuel, a former board member of CME, helped make sure that the city and state not only failed to enact the transaction tax, but actually went ahead and slashed existing taxes on electronic trading.

With CME spreading campaign cash around to state legislators, Edward McClelland of Chicago’s NBC affiliate reported that Emanuel’s legislative priority was “securing a tax cut for the Chicago Mercantile Exchange.” Emanuel pressured state lawmakers to pass the tax cut, and, not surprisingly, his push was successful. In the midst of a public revenue crisis, Illinois passed a tax cut legislation that significantly reduced the amount of electronic stock exchange transactions that are subject to Illinois levies. According to Medill News Service, that translated into an $85 million a year transfer of wealth from public coffers to the CME Group.

CME secured these breaks by threatening to leave the state. But that seemed far fetched. Chicago’s tax code already provided a special exemption for stock-trading computers, and, as the Sun-Times noted, the company’s capital investments in the region “say it’s not going anywhere.” Additionally, as a Depaul professor told Medill, under the existing tax arrangement, the CME already earned “the highest profit margin of any large corporation in the U.S.”

After Chicago shelved the transaction tax proposal and the Emanuel-backed stock exchange tax cut was enacted by the state legislature, CME’s profits skyrocketed, and they have remained strong since. The company has subsequently invested some of those resources in equipment to encourage – rather than curtail – high frequency trading.

So when you wonder how high-frequency trading came to dominate (and distort) the market, look to Chicago. Its recent history holds at least some of the answers. That history also proves exactly how the politics of financial speculation are so often driven by money.

[Image via Animal Farm]