Wednesday, March 23, 2016

I Like Bernie's Wall Street Transaction Tax Idea.

     I've been there and I've done that, so when I analyzed the Bernie Sanders plan to tax transactions in America's financial markets I brought some know-how into the project.  After
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It's An Infiltration
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more than two decades of membership and affiliation with the country's leading exchanges (Chicago Board Options Exchange, Chicago Mercantile Exchange, Chicago Board of Trade) I've listened to enough experts in the field (some would call them pros at these cons) to get a sense of how Sanders' idea would play, both politically and in the biz itself.  

     The plan is simple enough:  stick a small transaction fee on every trade in the stock, bond and the ultra-complex derivatives markets.  The amount that can be raised is in some dispute because it is based on the amount of trading done now, not the amount that would occur once the tax is in place, but there seems little doubt that over the course of a decade, the sum would be in the hundreds of billions of dollars.  Looking at the raw numbers and based on my trading floor and subsequent brokerage experience, I'd be very surprised if there were a noticeable dropoff in trading volume, which is the complaint voiced loudly by most opponents of the measure.  Using Sanders' proposed tax rates, the actual charge to a $1 thousand trade would range from 5 cents (that's on derivatives, using the notional--please don't make me explain "notional," lol**--value of the trade) to ten bucks for a bond trade.  
     It's true that high-speed traders, whose margins are paper-thin, might have to think twice before initiating their trades.  That's the segment of the market that's most likely to see a dropoff in volume, to which I say "good riddance."  Even the miniscule price tag attached to those trades by a transaction tax would slice into the thin price differentials on their trades. Those "flash" traders, who are here to stay, have created episodes of unredeemed bedlam in recent years (remember the "fat finger" selloff of a few years back?  Or the "flash crash?"), so any vehicle that discourages their participation (or at least reduces it) is fine by me.
     Outside of the high-speed crowd, though, I don't see a transaction tax doing that much damage to trading volumes and the liquidity that an active pool of speculators and investors create.  I don't want to get overly technical here, but I've always believed--and I think history supports this--that liquidity is an essential component of capital formation, which is the mother's milk
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of a growing, generally free-market society.  A similar tax is imposed on markets around the world, including some of the most active and profitable, like London, Singapore, Tokyo and Zurich.  I doubt that any of those markets has sustained a noticeable drop in liquidity or participation because of it. The United States had one from 1914 to 1966, a period of tremendous growth in capital.  

     I can see implementing this tax in stages instead of the all-at-once method pushed by Sanders as a way of gauging its impact and revenues.  I can also see some vigorous discussion about how the money would be put to work. There could be more compelling uses for the dough than providing college educations for everyone. What I can't see is letting the idea fall by the wayside because those forced to pay the tax are complaining to high heaven about it.   Seeing how well it works elsewhere and knowing it's been in place here with benign effect, I would love to see it given a try.

**For a quick definition of "notional value," go here.

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