1/4% Tax on all stock trades pushed in NY Times today
- Thread starter seasideheights
- Start date
After a little websurfing this evening, I find alot of misplaced anger aimed toward traders as serving no useful purpose. And I find virtually no traders attacking this problem. So here's a few points:
In our capitalistic society, when a job serves no useful purpose, it is eliminated. Who would be willing to pay the salary of a job which had no useful purpose? For instance, when the computer was invented, eventually many secretaries lost their jobs because they no longer served a useful purpose...the computer could do it cheaper. Instead of needing 3 secretaries, some companies might only need one, who operated a computer which replaced the efforts of the other 2. This is how capitalism works. What did not happen was Congressmen passing a law which taxed companies on the number of excess secretaries. Instead, we allowed the market to handle it as the proper time came. Those laid off secretaries could then return to school, train themselves in something else, perhaps computers.
In the stock market there are thousands of traders all competing to buy a stock which they believe can later be resold at a profit. There effort to do so, in competition with other traders, causes a tight market to be made. So when you look at where you could buy or sell a $20 stock, it might have a quote of 19.99 bid, 20 ask. This quote represents countless traders seeking to make a profit. Such that when an individual wants to make an investment, or liquidate an investment, he may do so at minimal cost due to the tight spread created by competing traders with the goal of making a quick profit.
Now let's tax these traders such that they can no longer profitably conduct their business. What happens is that volume drops, such that the spreads then widen out to reflect the risk that remaining traders must take due to the lack of traders. So that spread widens. It could easily become 19.5 bid- 20 ask, or worse. Such that now if you want to buy or sell an investment, it will cost you an extra $.50 per share. This in addition to the transaction tax, and the commission. And by the way, pass that transaction tax and the commission will be rising as well, as brokers struggle to replace their lost revenues from active traders. That cost could easily double or triple, or more, just as they were not that many years ago.
So let's see how that impacts the investor. An investor now pays an extra $.50 on his purchase of 500 shares at $20. He also pays it when he sells. That's $500 total. Plus the transaction tax of $50, and round-turn commission of perhaps $40. All together this means the investor to buy and sell this stock is paying $590, or 5.9% of his investment.
Does the trader serve a useful function? Of course, he tightens those spreads, thus saving the investor money every time he makes a trade. Remember now, in our capitalistic system, when a job does not serve a useful function it is eliminated by the market. So it becomes clear that traders DO serve an important, useful function. Their activity tightens the spreads such that the public saves money.
But let's go further. Companies are able to raise money via IPO's to expand their businesses (read create jobs), acquire capital equipment (read expand the economy), etc because there is an active capital market. Part of the bargain in the capital markets is that an investor can quickly liquidate his stock if he changes his mind. In other words, in our capital markets companies can raise billions of dollars because traders are there to provide liquidity in the secondary markets.
Now tax traders, so that they can no longer make a profit. This creates a liquidity issue in the capital markets, meaning that it will become much more costly for companies to raise money to expand and create jobs, because they have to lower their price to compensate for the lack of liquidity now present. The active trader serves a useful function by providing the liquidity necessary for our capital markets to properly function so that companies can expand, and create jobs.
Again, if traders provided no useful function, they would be gone. But as you can see, they provide various useful function at important levels of our capital markets, that save money, create jobs and capital for American industry.
In fact, it would be only through government edict that traders would cease to function. And the cost of this would be billions of dollars as you can see from the above examples. The traders tax may well be one of the worst ideas to be introduced as potential legislation in recent years. It would help to destroy the cogs of our capital markets.
OldTrader
In our capitalistic society, when a job serves no useful purpose, it is eliminated. Who would be willing to pay the salary of a job which had no useful purpose? For instance, when the computer was invented, eventually many secretaries lost their jobs because they no longer served a useful purpose...the computer could do it cheaper. Instead of needing 3 secretaries, some companies might only need one, who operated a computer which replaced the efforts of the other 2. This is how capitalism works. What did not happen was Congressmen passing a law which taxed companies on the number of excess secretaries. Instead, we allowed the market to handle it as the proper time came. Those laid off secretaries could then return to school, train themselves in something else, perhaps computers.
In the stock market there are thousands of traders all competing to buy a stock which they believe can later be resold at a profit. There effort to do so, in competition with other traders, causes a tight market to be made. So when you look at where you could buy or sell a $20 stock, it might have a quote of 19.99 bid, 20 ask. This quote represents countless traders seeking to make a profit. Such that when an individual wants to make an investment, or liquidate an investment, he may do so at minimal cost due to the tight spread created by competing traders with the goal of making a quick profit.
Now let's tax these traders such that they can no longer profitably conduct their business. What happens is that volume drops, such that the spreads then widen out to reflect the risk that remaining traders must take due to the lack of traders. So that spread widens. It could easily become 19.5 bid- 20 ask, or worse. Such that now if you want to buy or sell an investment, it will cost you an extra $.50 per share. This in addition to the transaction tax, and the commission. And by the way, pass that transaction tax and the commission will be rising as well, as brokers struggle to replace their lost revenues from active traders. That cost could easily double or triple, or more, just as they were not that many years ago.
So let's see how that impacts the investor. An investor now pays an extra $.50 on his purchase of 500 shares at $20. He also pays it when he sells. That's $500 total. Plus the transaction tax of $50, and round-turn commission of perhaps $40. All together this means the investor to buy and sell this stock is paying $590, or 5.9% of his investment.
Does the trader serve a useful function? Of course, he tightens those spreads, thus saving the investor money every time he makes a trade. Remember now, in our capitalistic system, when a job does not serve a useful function it is eliminated by the market. So it becomes clear that traders DO serve an important, useful function. Their activity tightens the spreads such that the public saves money.
But let's go further. Companies are able to raise money via IPO's to expand their businesses (read create jobs), acquire capital equipment (read expand the economy), etc because there is an active capital market. Part of the bargain in the capital markets is that an investor can quickly liquidate his stock if he changes his mind. In other words, in our capital markets companies can raise billions of dollars because traders are there to provide liquidity in the secondary markets.
Now tax traders, so that they can no longer make a profit. This creates a liquidity issue in the capital markets, meaning that it will become much more costly for companies to raise money to expand and create jobs, because they have to lower their price to compensate for the lack of liquidity now present. The active trader serves a useful function by providing the liquidity necessary for our capital markets to properly function so that companies can expand, and create jobs.
Again, if traders provided no useful function, they would be gone. But as you can see, they provide various useful function at important levels of our capital markets, that save money, create jobs and capital for American industry.
In fact, it would be only through government edict that traders would cease to function. And the cost of this would be billions of dollars as you can see from the above examples. The traders tax may well be one of the worst ideas to be introduced as potential legislation in recent years. It would help to destroy the cogs of our capital markets.
OldTrader
the point here simply is that 0.25% or something similar is absolute nonsense. it would completely KILL liquidity.
so - can anyone really be interested in heavily reduced liquidity?
the exchanges - NOT (they lose a big part of their business, so why should they let it happen?).
the brokers - NOT (same).
and the big players - NOT (whom should they trade with if nobody is left on the other side?).
0.25% would kill the markets and not raise a lot of money. and if it would be MUCH lower (0.000xxx%) it would not raise much money either - so....
some say a t.tax should reduce 'evil' speculation - others say it should raise a lot of money. it cannot do both i'd say. reduced liquidity will reduce stability and the next market selloff will be even more brutal. people out there should start to understand that.
so - maybe they should simply try it. wipe out small traders. take the money from small investors - and then see what happens.
the effect will be only negative. and if the last moron understands that and this tax will be eliminated it surely won't come up again EVER.
so - can anyone really be interested in heavily reduced liquidity?
the exchanges - NOT (they lose a big part of their business, so why should they let it happen?).
the brokers - NOT (same).
and the big players - NOT (whom should they trade with if nobody is left on the other side?).
0.25% would kill the markets and not raise a lot of money. and if it would be MUCH lower (0.000xxx%) it would not raise much money either - so....
some say a t.tax should reduce 'evil' speculation - others say it should raise a lot of money. it cannot do both i'd say. reduced liquidity will reduce stability and the next market selloff will be even more brutal. people out there should start to understand that.
so - maybe they should simply try it. wipe out small traders. take the money from small investors - and then see what happens.
the effect will be only negative. and if the last moron understands that and this tax will be eliminated it surely won't come up again EVER.
Surprisingly, it easily could, even without any drops in volume. In the interest of fairness, because it is always likely to be the most powerful of arguments, I've tried to estimate the range of possible outcomes (market impact) of introducing a 0.25% transactions tax. One of the most optimistic scenarios resulted in a bid/ask spread of 0.05, but there are also more pessimistic ones, when not only 0.50% extra cost has to be borne by the economy (regardless of the exemptions), but market volume drops by half. I used a representative share price of $100, and a marginal costs estimate (brokerage commisions) from an industry-leading discount broker. Other costs of doing the market-making business were assumed to be zero, i.e. that retail traders have only variable costs, i.e. brokerage commissions.
In every competitive market, traders are simply price-takers and the price reflects their marginal cost of doing business. So a mutual fund manager buying a popular stock (such as the S&P 500 ETF priced at $100) has to pay 1 cent per 1-lot purchase of $10k worth of this stock, to be serviced by traders in today's competitive markets. When does this cost come from? It arises because traders have to pass their costs onto their client - the fund. We are not talking brokerage commissions now, which are likely much lower for institutions, we are talking the immediate difference between the purchase price and the post-purchase market value (to be reported to the fund's shareholders), i.e. the so called bid/ask spread. If the price does not change at the end of the reporting period, the fund will report a 1-dollar loss (1 cent lost on a 100-share lot of $100-shares), because the mark-to-market rule applies and the SELL price (market bid) is lower by 1 cent than the fund's purchase price (market ask). Is this cost of doing business high? 1 part per thousand, I'd say pretty low, so the fund manager can charge her clients less in management fees than he would in other, less competitive countries.
Let's just assume that there are no other costs of doing the trading business, and the currently observed 1 cent difference between the BUY and SELL prices of most liquid US stocks is so low only thanks to the round-trip brokerage commissions for the retail trader being as low as 1 cent (1 dollar per trade, for lots of 200 shares or more, see e.g. the Interactive Brokers commission schedule). 1 dollar paid on each 200-share trade (2 dollars both ways) is exactly equiavalent to a 1-penny spread between the stock market prices (2/(200*$100) = 0.01%= 0.01/$100).
If you raised brokerage commissions, e.g. 10 times, it would no longer make sense to bid the stock to buyers at 99.99 and offer the stock for sale at 100.00, because the currently available profit of 2 dollars would be insufficient to meet the increased round-trip cost of 20 dollars (10 per BUY and 10 per SELL transaction). Just like an increase in the Value Added Tax would be always passed onto the consumers (added to the purchase price), traders would have to reluctantly add the raised cost to their calculation of the offered price, simply to break-even.
Reluctantly, because they know how competitive the market is, and that they are faced with a very elastic, almost flat demand curve (has any regulator ever tried to check its elasticity before considering this tax?). In such cases, raising quoted prices just a tiny bit immediately stifles demand disproportionately more (to almost zero). No-one would ever come to the trader's corner shop to buy stocks if she raised her offered stock price to 100.05, where the competitor on the other side of the street offered the same standardized stock at only 100.01. Moreover, no-one wants shares spread 0.05 cents apart even if there aren't any more competitive offers... no transactions are made in periods and on issues when and where only the market making firms have the monopoly to serve the client.
In a competitive market, even a seemingly small (by main street standards) transaction tax of just a quarter of a percentage point could be easily larger than the traders' revenues, so it will be immediately passed onto the consumer - the mutual funds (and then to their clients, in management fees and/or lower returns). After the 0.50% tax is imposed (the total tax impact is always *twice* the advertised 0.25%, because the fund has to sell eventually to lock-in gains), the fund manager will have to pay 0.5% more for each round-trip stocks transaction (which she makes on average at least once on the entire stocks portfolio in the process called 'rebalancing' - see the annual turnover column in Morningstar reports).
You quickly say: retirement accounts will be exempt, so that's not a problem. But that would be equivalent to exempting from VAT those grocery stores in which only pension fund manager spouses (here: husbands) are allowed to shop (and exemptions for market making firms are not enough - see below). Can you selectively exempt from the transaction tax some stock market traders, allowing them to keep on quoting to some preferred 'good cause' clients the current tightly-spread prices such as 99.99/100.00)? No you cannot do that, because traders are anonymous and market access is more or less equal, and there are no preferred buyers when it comes to price (even big players using dark pools have to transact at the same price as all other market participants). So your retirement account will have to pay that 0.5% tax - not directly (exemption will apply on that level), but because the prices will no longer be just 1 penny apart. They will be 0.5% apart... because you have raised the cost of doing business to the liquidity providing traders. They can no longer afford to quote you a penny-wide spread, because the quoted offer price has to include your new 'Tobin friction' - the round-trip cost of 0.25% paid *twice* (for buying and selling) on those 100 shares worth $100. In total $50=2*25=2*0.25%*100*100 dollars. On a 200-share lot, the cost of the new tax would be a round sum of 100 dollars. When compared with the today's round-trip brokerage commission cost (which we assumed liberally to be the only cost of doing the trading business) of just 2 dollars (as computed before), you see that the bid/ask spreads would have to raise 50-fold for the traders just to break even. Hence the 'outrageous' 0.5 spread amount computed by the OldTrader before me. So in future, the mutual fund or the retirement account investor, punished equally with everyone else by this tax, will see the following prices:
99.75 - 100.25 (i.e. the round-trip tax rate apart),
instead of today's:
99.99 - 100.00 (i.e. the round-trip brokerage commission rate apart),
and buying this stock will immediately offset the fund by -0.50%. This will be the new mark-to-market return reported to the mutual fund shareholders if the price did not change at the end of the period, 50 times worse than the current -0.01%.
And please do not think that exempting maker makers would improve the situation - these firms have large overheads (light-speed technology has to cost after all), so when they are alone, unhindered by the competition, e.g. at 5 AM at night, they offer our stock (which is most liquid in the world, incidentally) at 100.05, five times more expensively than the retail trading community would.
So here we have a range of estimates of the adverse impact of this tax on the retirement plans and funds:
- 5 cents per $10k (-0.05% loss from today, i.e. 20% of the maximum tax revenue of +0.25%, earned assuming heroically no change in aggregate volume, and that the monopoly power of the market makers will not be exploited more than it is today, and they will keep quoting prices as they do today in periods without competition),
- 50 cents per $10k (-0.5% loss from today, i.e. 200% of the maximum tax revenue, which will happen if market makers join the marginal cost payers, i.e the taxed traders, with the other heroic volume assumptions maintained as above),
- 50+ cents per $10k (-0.5% loss from today, but with an additional -50% drop in volume, i.e. a 400% ratio of the economy-wide cost to the projected tax revenue - now raising only half of the projected amount; computed without any heroic assumptions made, i.e. letting the market makers behave as rational agents, joining the marginal cost payers, and using the Swedish case to estimate the extent of the decline in the stock market volume),
Is this being priced into the market as a real possibility? The broker-dealer ETF which contains stocks that would be negatively affected by a trans tax implemented, IAI has underperformed the general market by a whopping 9% in the last month alone(see attached) with the under performance accelerating in the last few sessions.
Being a trader, I want to hedge this risk out of my trading as I estimate it would take at least half of my gross profits if this stupid tax(why should the little guy foot the bill for the big guys fuck ups?) goes through. I was thinking of buying some long-dated deep OTM puts on the following names IAI, OXPS, IBKR, AMTD, SCHW, ETFC, TRAD, NYX, NDAQ as these stocks would likely take a bath should it go through, and the potential options profits should lessen the blow somewhat.
Anyone else thoughts/idea's how we can hedge this risk, apart from letting the politicians hear our voice? Any other stocks that are exposed to this tax? What would be the number 1 stock to be negatively affected by this tax?
What we need is a big market correction with GS posting a quarterly loss or decreased profits, because right now the market looking so bubbly and everyone on the street making good coin again makes for an easy target, the unfair and emotional driven coverage of HFT doesn't help either. It will be marketed as a tax against the rich, when really its good ole middle class coughing it up. How about we make anyone who created a sub prime derivative pay 90% of their profits going forward, put some real justice into the system.
Can you imagine GS and co having no competition in HFT or statarb? The same company who created sub prime backed derivatives then palmed the risk off onto the system and then hands out a further 18b in bonuses to its cult members this year will enjoy a further regulation ruling in their favour.
If the time came, maybe we need to take to the streets so the fuckin idiots on the hill listen to us and average Joe understands its just another swindle.
Being a trader, I want to hedge this risk out of my trading as I estimate it would take at least half of my gross profits if this stupid tax(why should the little guy foot the bill for the big guys fuck ups?) goes through. I was thinking of buying some long-dated deep OTM puts on the following names IAI, OXPS, IBKR, AMTD, SCHW, ETFC, TRAD, NYX, NDAQ as these stocks would likely take a bath should it go through, and the potential options profits should lessen the blow somewhat.
Anyone else thoughts/idea's how we can hedge this risk, apart from letting the politicians hear our voice? Any other stocks that are exposed to this tax? What would be the number 1 stock to be negatively affected by this tax?
What we need is a big market correction with GS posting a quarterly loss or decreased profits, because right now the market looking so bubbly and everyone on the street making good coin again makes for an easy target, the unfair and emotional driven coverage of HFT doesn't help either. It will be marketed as a tax against the rich, when really its good ole middle class coughing it up. How about we make anyone who created a sub prime derivative pay 90% of their profits going forward, put some real justice into the system.
Can you imagine GS and co having no competition in HFT or statarb? The same company who created sub prime backed derivatives then palmed the risk off onto the system and then hands out a further 18b in bonuses to its cult members this year will enjoy a further regulation ruling in their favour.
If the time came, maybe we need to take to the streets so the fuckin idiots on the hill listen to us and average Joe understands its just another swindle.
This is going to be a high visiblity page.
Please comment in the comment section at the bottom of the article.
http://www.nypost.com/p/news/business/cramer_vs_furor_iNCDIFzRaCH8J9TsfEFYDP
Please comment in the comment section at the bottom of the article.
http://www.nypost.com/p/news/business/cramer_vs_furor_iNCDIFzRaCH8J9TsfEFYDP
I agree with what you have said a few times already in this thread: this topic is getting too much press. And that's dangerous.
And now it is in the idiots-r-us Fox owned local newspaper (which undoubtedly will now make the local newscasts) which will raise the ire more of the pitchfork crowd, especially when they read the part about traders sending death threats and Cramer calling the FBI. This article does not endear any of us to the sheeple.
We need to keep writing Congress. But to make sure your point is made, we need to concentrate our resolve in the local markets that matter, NYC and Chicago, where the death of the small trader and the decrease in activity will be felt the most. I already know both Schumer (D-NY) and Menendez (D-NJ) have gone on record as being opposed to this tax, but if they (and Chicago representative politicians) waver in their resolve, we need to keep reminding them of the economic effect a tax such as this will have on their constituents.
The online articles at least give us a platform to enter our viewpoints. It's extremely important that we fill those comment sections with them. Otherwise, the author & publisher of the stories will read all pro-tax comments & believe THAT is what the general public wants & believes. This is time for us to take our stance for the sake of our own livelihoods.