1/4% Tax on all stock trades pushed in NY Times today

[tomdavis]

Quote from Robert A. Green:

We need rock solid examples of how this so called "tiny tax" puts active traders out of business. My Forbes editor thought I was not credible when I wrote that and he rejected my FTT petition on my Forbes blog. Please get me the numbers I need to lay this out for people clearly. Thanks.

Using the ES (S&P mini) futures contract as an example:

ES futures contract value assumed for this example = 1400.

A good short-term ES futures trader can make an average of $30-50 profit (before expenses) per-contract per-trade over the long run. Commissions plus other expenses (hardware/software/bandwidth/development/data/research/education/etc.) can run easily $5-10 per contract per round-trip trade (Commissions alone run $3-4). That leaves $20-45 profit per-contract per-trade on which the trader then pays federal and state income taxes.

What happens when we add the "tiny" FTT?

The Defazio-Harkin bill (.03%) would place a $42 transaction tax on each round trip contract. The Ellison bill (.05%) would place a $70 tax per round trip.

The FTT wipes out most, if not all, short-term futures traders.

Another thing to keep in mind is that the transaction tax applies to losing trades as well as winning trades, turning a losing streak into huge capital drawdown, thereby greatly increasing the risk per trade while decreasing the per-trade returns. Even if someone could manage to make a small profit per trade, the capital requirements to withstand the drawdowns would be prohibitive for many independent traders (and in most cases the small returns wouldn't be worth the large risk even if the capital was available).

Perhaps some other futures traders could share their experiences.

It would be great if some of the stock and bond traders could provide examples of how the FTT would effect their P&L.

 

[pbb]

Quote from Robert A. Green:

We need rock solid examples of how this so called "tiny tax" puts active traders out of business. My Forbes editor thought I was not credible when I wrote that and he rejected my FTT petition on my Forbes blog. Please get me the numbers I need to lay this out for people clearly. Thanks.

The fdax @ 7600 is worth 7600 x €25 = 190000

A . 01% means an extra €19 to a one-side trade, €38 roundturn. A roundturn now is < €4 when using the right retail broker. That is about ten times the current costs, you need 2 full points in profits to get even plus à little gain. When your stop is at 10 point, it's actually at +/-12. When your target is at 20, it's actualy +/- 18. Slippage not included. One good trade and bad trade combined, you would get 10 points in profits before ftt and 6 after ftt. In a loosing streak you get killed.

Slippage could be increasing as ftt is implemented. Do the math. For stocks it's different, but small caps will be affected by lower volume and more extremes. Banks, which are said to be punished for their bad behaviour, will be king. They add tax to their customers, they will loose on volume, but they will be gaining setting spreads as market makers and inhouse matching. In my opinion they will be the winning side. They are not punished, but the man in the street doesn't know that, they believe their hardworking politicians that tell just part of the story.

Traders will be forced to differentiate their products, where possible. But those products will be added once they see a flow to other products. For now, fx seems to be ok, with a free flow of capital, but that can change as well. Hope that by the time they will add that, there is prove that ftt was à big mistake.

Just my thougths.

 

[sculptor66]

Quote from tomdavis:

Using the ES (S&P mini) futures contract as an example:

ES futures contract value assumed for this example = 1400.

A good short-term trader can make an average of $30-50 gross profit per contract per trade over the long run. Commissions plus other expenses (hardware/software/development/data/research/education/etc.) can run easily $5-10 per contract per round-trip trade (Commissions alone run $3-4). That leaves $20-45 profit per contract per trade on which the trader then pays federal and state income taxes.

What happens when we add the "tiny" FTT?

The Defazio-Harkin bill (.03%) would place a $42 transaction tax on each round trip contract. The Ellison bill (.05%) would place a $70 tax per round trip.

The FTT wipes out most, if not all, short-term futures traders.

Another thing to keep in mind is that the transaction tax applies to losing trades as well as winning trades, turning a losing streak into huge capital drawdown, thereby greatly increasing the risk per trade while decreasing the per-trade returns. Even if someone could manage to make a small profit per trade, the capital requirements to withstand the drawdowns would be prohibitive for many independent traders (and the small retruns wouldn't be worth the risk).

Perhaps some other futures traders could share their experiences.

It would be great if some of the stock and bond traders could provide examples of how the FTT would effect their P&L.

Your numbers are spot on.

According to my statistics over the last 8 years, my average gross profit per trade and contract was 47 USD (rounded). Those statistics are based on my trades in ES and YM.

The interesting thing here is that my average holding period is about 2-3 hours, so I am definitely NOT one of those high speed, high frequency traders the proponents of the FTT say they are targeting.

But even when trading with this relatively long holding periods the so called 'tiny' transaction tax rates according to the Defazio-Harkin or Ellison bills would be devastating for me.

Or, to put it in other terms: There will be absolutely NO liquidity and volume left in the US futures markets should this tax come into action, because it would not only put scalpers and HFTs out of business, but all short term traders.

 

[icarus618]

Personally, I have zero concern about the FTT. Markets are global and participants are not without choices. If the FTT passes in an overly oppressive form, I will just switch to a non-US market. I've been scoping out the KOSPI the last couple years for that purpose.

I've been through the NASDAQ crash and the switch to penny increments that killed the golden goose 12 years ago. I adjusted by migrating over to the stock index futures. The FTT is not on the same scale; it would just raise transaction costs and it is unclear how much more the bureaucrats can get away with raising. Currently there are transaction taxes already in place - the Section 31 fee on stocks and the NFA fee on futures, not to mention the rather large vig charged by the CME.

 

[lindq]

Quote from Robert A. Green:

We need rock solid examples of how this so called "tiny tax" puts active traders out of business. My Forbes editor thought I was not credible when I wrote that and he rejected my FTT petition on my Forbes blog. Please get me the numbers I need to lay this out for people clearly. Thanks.

I can't quantify this in numbers, but job losses throughout the industry (which is far more than Wall Street) would be significant. Brokers, data providers, software and hardware vendors, website operations, etc. etc.

IMHO, nobody gives a damn about the impact on individual traders, since our activities are far removed from the experience of most Americans. So we can't expect them to care. But they should care about the impact on employment.

I would be surprised if large support organizations and brokers haven't made their own projections, and might be willing to share general information to help in your media initiatives.

 

[Pasternak]

Quote from icarus618:

Personally, I have zero concern about the FTT. Markets are global and participants are not without choices. If the FTT passes in an overly oppressive form, I will just switch to a non-US market. I've been scoping out the KOSPI the last couple years for that purpose.

I've been through the NASDAQ crash and the switch to penny increments that killed the golden goose 12 years ago. I adjusted by migrating over to the stock index futures. The FTT is not on the same scale; it would just raise transaction costs and it is unclear how much more the bureaucrats can get away with raising. Currently there are transaction taxes already in place - the Section 31 fee on stocks and the NFA fee on futures, not to mention the rather large vig charged by the CME.

Good for you! What do you do when they make a FTT on the Kospi? Trade the OBX in Norway or in Moscow?

 

[justrading]

Quote from lindq:


IMHO, nobody gives a damn about the impact on individual traders, since our activities are far removed from the experience of most Americans. So we can't expect them to care. But they should care about the impact on employment.

Not just Americans but others also. Telling someone you buy and sell financial instruments for a living typically gets a response of curiosity or just a blank look, as in what kind of way is that to make a living. Investor sounds fine to the average person, trader does not.

I would expect zero sympathy at best, and at worst suggestions that perhaps this is an opportune time to get a real job.

I have come to the point where I simply tell people I am retired and manage my investments; other than why I retired a little early, that usually ends the discussion which would be a colossal waste of time anyway.

 

[icarus618]

Quote from Pasternak:

Good for you! What do you do when they make a FTT on the Kospi? Trade the OBX in Norway or in Moscow?

Who are the "they" you refer to? If you mean the U.S. government imposing the Tobin tax on U.S. traders of non-U.S. markets, I have already considered that and I am prepared for it.

The bottom line is, imposing the Tobin tax will just chase away liquidity to somewhere else. I will follow and I am prepared to move physically and renounce U.S. citizenship if that is what is required to continue trading.

 

[justrading]

Quote from icarus618:

Who are the "they" you refer to? If you mean the U.S. government imposing the Tobin tax on U.S. traders of non-U.S. markets, I have already considered that and I am prepared for it.

The bottom line is, imposing the Tobin tax will just chase away liquidity to somewhere else. I will follow and I am prepared to move physically and renounce U.S. citizenship if that is what is required to continue trading.

I believe the Korean govt. is introducing an FTT on futures and derivatives.

 

[icarus618]

Quote from justrading:

I believe the Korean govt. is introducing an FTT on futures and derivatives.

Yes, that's the talk anyway, by 2016. The supposed rationale is to offset the fact that there is no income tax on the gains. The rates proposed are much lower than that of the Tobin tax - 0.001% on KOSPI 200 index futures trades and 0.01% on the index options.