Today was a brutal day on Wall Street. Through no fault of investors.
Today was brutal because of traders and financial engineers who trade on every piece of data. Those that work from quantitative formulas that drive trades based on data input. Not a single one of them acts like a shareholder. And that is the reality of the stock market.
The market is no longer driven by shareholders. The market is driven by formulas that drive trades.
So what should the government do?
Tax every single share of stock that is bought and sold 25 cents per transaction. One quarter. If you buy a share of stock, your brokerage pays a 25c tax. If you sell a share, your brokerage pays a 25c tax. 1 share, 100 million shares. Its 25 cents per share.
Of course the tax will be paid for by those of us who are buying and selling stocks. So what? Here is the reality. If you are a true investor. Someone who wants to own a share of stock in a company you believe in, then its an amount that is not going to impact your investment decision making process. You bought those shares to be a shareholder.
If you don’t think the company you are buying is worth at least a quarter more than what you are paying, why are you buying shares?
If you are a professional trader or an institutional trader that trades continuously, the same type of traders that created the mess in the market today, then it may impact your decision making process, but only to the point of reducing your returns by a minimal amount. Its not going to change your inclination to trade. As everyone on Wall Street will tell you “Traders Trade”. You may trade less and make less in aggregate, but no one but you cares about that. You will find your way to make money. There is always the loop hole and inefficiency. That’s what you live for. But you won’t stop trading.
If you are a day trader, you are going to have to be right more often or actually hold on to stocks for a longer period of time. That’s ok. I know it will be rough on some of you that make a living this way. But in reality, you don’t add anything to the markets.
Whats the bigger economic impact of having the tax?
If the NYSE, Nasdaq, Amex and OTC are trading 2 Billion shares a day or more, like today, that’s $ 500 Million Dollars PER DAY. If there are 260 trading days a year. Thats about 130 Billion dollars a year. If volumes drop because of the tax. It is still 10s of Billions of dollars per year.
That’s real money for the US Treasury. That’s also an annual payment towards the next time Wall Street screws up and we have a black swan event that no one planned on.
Of course there has to be some fine print. You could reduce the tax per share for stocks under $5 dollars to 5cents. But i would leave it at 5cents even for stocks priced at pennies per share or less. This tax would act as a protection for investors and traders who get pitched unregulated penny stocks and who are more often than not the victims of rip off artists. It would minimize the pink sheet companies that trade billions of shares of stocks priced for pennies. Those companies that are legit, could do a reverse split to protect their investors. The others can go away. They probably shouldn’t be public anyway.
The stock market today is dominated by financial engineers and traders. Institutions who look for the loopholes and exploit them. That’s not a bad thing. There will always be loopholes, and they will always find them. But at least with the tax, when they do, we are protecting ourselves a little bit. Heck, the Treasury could join in the show and buy long and short 20pct out of the money derivatives on the market to protect us even more. This way if things go haywire like they did a couple years ago and have the past few days, the Treasury will be playing with Wall Streets’ money. I’m sure Main Street won’t mind terribly if the Treasury plays with the house’s money.
Particularly since the only given for Wall Street is that every 5 years or so there will be an extreme event. Why? Remember the rule of Wall Street …
First there are the innovators. Then there are the imitators. Then there are the idiots. And there are tons and tons of idiots. Just look at the billions upon billions squandered in closed Hedge Funds. The idiots always find there way back into the market and the market always wipes them out taking investors down with them.
It’s time to make all those playing this game pay a tax per transaction.
And one more thing. When Wall Street talks about how a tax will hurt liquidity, ask them why, if liquidity is so essential to a market, they don’t want any transparency and aren’t trying to increase liquidity for the derivatives they sell on a custom basis? Or why they are not trying to increase the liquidity for the corporate bond markets where bonds trade with a huge spread?
They want minimal transparencies where the spreads are high and they can keep them that way and price their products anyway they like. Where the spreads are already low, they cry wolf about the liquidity they need to do business. Let me explain the reality of liquidity in today’s world. It won’t increase the amount of capital available to businesses. The companies that plant servers next to stock exchanges to make a few cents per trade aren’t buying IPOs, secondary offerings, or holding shares in support of valuations in a company they believe in. Every time markets crater, there is never a lack of liquidity. There are still a billion or more shares traded. There is plenty of liquidity.
So tax the hell out of Wall Street, give it to main street. Make it tougher for the financial engineers and you will make it easier for investors to evaluate companies and hold on to shares and maybe even act like owners of those companies.
Taxing the Hell Out of Wall Street could actually increase the trust investors have in Wall Street. And it might just protect us when the next meltdown happens. And it will happen.
The idiots will see to it.
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25 cents tax per share on a $10 stock is a 2.5% loss upfront.The Independent Budget Office of New York City and all global studies including the IMF have shown that transaction taxes result in net negative revenue after subtracting capital gains losses and millions of tax revenue producing jobs. Proponents are not subtracting an estimated 90 to 95% drop in trading volume and the other revenue losses. The banks, Wall St, mutual funds and others will not pay this tax. The tax and all the hidden costs will entirely be passed onto all investors. The chief investment officer of Vanguard Group, top mutual fund company, says this tax will cost investors a minimum 2% annually just to hold and remain invested in a mutual fund. That is because the tax will increase indirect costs multiples more than the tax itself. The bid-ask spread will increase by fifty times as trading competition is eliminated and brokers and traders go bankrupt. That cost will be paid by the fund as they purchase stocks and that cost will be passed on to us. Broker fees will increase by ten times as most brokers will fail. That and more will reduce the power of compounding. Important: Reduced compounding will cut the union’s pension funds and all of our retirement accounts by one half over a working lifetime. A couple million US jobs will be lost to other countries. The tax will reduce revenue, we won’t be able to retire, and we will lose our jobs.
ftf,
He is suggesting a 25cent tax per TRADE, not per share.
No. He’s proposing a 25c per SHARE tax.
Sure, tax everything….that is sure to spur a desire to invest. Capitalism and the de facto meritocracy that made America great are entering a poisonous era of sniveling, apologist governments and institutions with Robin Hood ideology. When hard work, and yes, risk-taking are no longer rewarded, and laziness and stupidity are no longer penalized, it doesn’t take a rocket-scientist to figure out what will happen to this great nation of ours….
The top 10% already pay a disproportionately huge percentage of income taxes, property taxes, and sales taxes. Enough is enough. Nearly 50% of “taxpayers” pay no tax. In a democracy, they have no disincentive to vote for every social program imaginable.
Indeed… anyone who invests in anything, regardless of how much they invest, should be redoubling their efforts to oppose the push for financial transaction taxes. For there are those who will be attempt to use the recent rapid plunge as an excuse to implement such a tax. They will take advantage of the fear and panic, avoid and obfuscate the true consequences of such wealth confiscation policies via populist rhetoric, and attempt to spin things to suggest that the various problems with our markets and trading systems are best solved via a financial transaction tax. In reality, all they are really trying to do is take money from those hard working, responsible Americans who have managed to save some.
How the hell is it “hard work” for a quant to place a trade? It’s a little research and a few clicks of a mouse. You can’t compare it to the real hard work of people on Main Street that are actually producing something in the real economy. None of these traders would last an hour picking fruit in Florida. *That* is hard work.
Traders and banks are no better than the house in Vegas. They are however more despicable when they wrap themselves in Calvinistic proclamations of how hard they work. Especially when they fail to see how their fortune comes at the expense of those that actually produce something. They haven’t worked harder. They are not “more responsible”. They are just fortunate, and that fortune depends on the whole society NOT merely their personal qualities. If they aren’t going give back voluntarily, then society must mandate that they give back through taxes.
Forget it all. I’m investing in coke, hookers and the next ball game. It’s tax free and about as safe as wall street.
Right, Joe from Chi. And if you’re looking for a little more risk, there’s always Haiti.
Let’s tax Mark Cuban 25 cents a word and give it to the reading public. It’s only 25 cents a word. In Cuban’s words, So what? Here is the reality. If you are a true writer. Someone who wants to read what you write, and you are going to write about stuff you believe in, then its an amount that is not going to impact your writing decision making process. You wrote to be a writer. How does that sound?
Cuban’s rant falls apart based on his wrong-headed assertion that traders “don’t add anything to the market”.
Traders and others who work speculatively in markets make markets worth smoothly through fluid price-correcting activities.
Cuban would do well to consult the excellent essay “Why We Need More Speculators” (http://thinkmarkets.wordpress.com/2010/03/10/why-we-need-more-speculators/) or a 2009 Op-Ed response to Paul Krugman by Don Boudreaux (http://cafehayek.com/2009/11/krugman-on-the-attac.html) which would add some clarity to his thinking.
K – Mark’s point: Are trader’s gambling or investing? They’re gambling – and I say purchase a one-way ticket to Vegas or roll online. Either way, get out of the market.
Wouldn’t unintended consequences drive people away from cheaper stocks? A flat fee would incentivize investments in large companies with more expensive share prices.
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Mr. A has $100 to invest in Company A at $1/share. With the tax, he pays $1.25 per share, so he can afford 80 shares.
Mr. B has $100 to invest in Company B at $99.75/share. With the tax, B can afford 1 share.
Both stocks rise 10%.
Mr. A sells his 80 shares for $88. Assume the $8 gain is subject to a 25% capital gains tax ($2).
Mr. B sells his single share for $109.97. His $9.97 gain is subject to $2.50 in capital gains.
Both spent $100. Both stocks rose 10%. Both paid capital gains.
* Mr. A ends up with $86.
* Mr. B ends up with $107.47
I agree with a tax, but I think it should be a % of share value not a fixed amount. That way companies won’t be able to engineer around this by not splitting stock and having shares that are very high value. Why should someone pay the same tax to buy a Berkshire Hathwaway share that is worth thousands as for a stock worth $30? A % would be a much fairer way to do it. But overall I agree with your post.
p.s. while we’re at it, get rid of OTC derivatives adn force them all onto an exchange!
Wouldn’t this cause all of the companies to do huge reverse splits to get their share prices as high as possible? This way the tax is minimal? If GE’s share price was $20,000, like Berkshire, people only need to buy 1 share and pay 25cents in tax. Another stupid populist idea by Cuban – he must be thinking of running for Congress!