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Old 12-11-2009, 11:34 AM   #41
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Originally Posted by lsbcal View Post
If the tax were maybe .0025% I could live with it. My average ER is around 0.25% and I figure maybe 1 trade/yr on average. So 0.25% would double my ER, ouch.
While the direct cost of the tax looks bad enough, the indirect impacts seem even worse. Just the likely increase in bid/ask spread will significantly reduce the annual returns of mutual funds, whether they are held in IRAs/401ks or not.

Here's a Powerpoint presentation from a prof at Rutgers on the issue of Securities Transaction Taxes (STTs). Unfortunately, it has a lot of formulae and no notes pages to go with the slides. The author examined the impact of STTs in several places where they've been tried, including one imposed by New York State in 1976. Impact on the NYSE (see last slide):
-- STT and volatility directly related (i.e. the tax increased volatility)
-- STT and liquidity were inversely related (i.e. more tax=less liquidity)
-- STT and market share inversely related (i.e. more tax= less business for the NYSE, stock volume moved to exchanges out of NY state. In the case of a US-wide STT, the implication is that foreign exchanges would benefit at the expense of the US.)
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Old 12-11-2009, 11:37 AM   #42
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Any ideas on who to email in government to voice objections to this 0.25% tax idea? Maybe just our state's senators? I did find this link: H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009 (GovTrack.us)
Hopefully the bill will go nowhere.

If the tax were maybe .0025% I could live with it. My average ER is around 0.25% and I figure maybe 1 trade/yr on average. So 0.25% would double my ER, ouch.
I would contact your three representatives in Washington. I have been told that calling them or snail mailing them is more effective than an e-mail.

By the way, I did just that. My Republican rep said he was against it while my two Democratic senators were both undecided. But they do keep track of the calls and where we people stand so I do think it is worthwhile.


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Old 12-11-2009, 12:36 PM   #43
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With many more market participants we are likely to have a more efficient market. As an example look at what we had in the 1960's where the bid ask spread was 1/8, 1/4 or wider. Because of technology, discount brokers, 401ks etc we have a completely different market place than we had 50 years ago. We have many, many more participants. As a result, we no longer have the wide bid ask spreads as we had then. If most of these participants disappear (which even the proponents in Congress acknowledge), we are bound to see a market place that we had 50 years ago again and thus a less efficient market. I hope my explanation makes sense.

I'm guessing we are talking apples and oranges. I think the proponents want to punish "Wall Street" (whatever that is). But in their eagerness to do so they, with this tax, are also punishing Main Street. The brokers at Scottrade, who may have a branch down at the downtown mall in middle America, would likely lose their jobs if their commissions would jump 10 fold.
I don't get why. Why not instead directly go after what caused the problems the last couple of years. Why declaring war on people that had absolutely nothing to do with it? And why would it benefit society to no longer have Etrade, Schwab etc. Or to make a greater point; we have the best stock market in the entire world. It is something we should be proud of. Why would we voluntarily relinquish that title?

Finally, take a look at Sweden. They implemented their transaction tax back in 1984. They abolished it less than 8 years later. Why? Because volume left Sweden or just disappeared. Sweden still hasn't recaptured all their volume that they lost. While Sweden is not the US, the principle applies. Unless every country on the planet agrees to the same tax, it will not work.
My bold - I'm quite sure we wouldn't go back to the market we had 50 years ago. Computers have changed all businesses. Most of the compression is bid/asked is probably due to better information flow. Maybe you know better, but I see lots of changes other than volume.

I'd like to see the calculation of how taking out the volume of the "High Frequency" increases net costs for long term investors. That is, I'm guessing that any increase in bid/asked paid by long term investors is less than the savings of taking the HF markup out of the cost.

The bill (as I understand it) exempts the individuals who are trading with Scottrade, Etrade, and Shwab. Even if they weren't, a 25 bp charge on a stock that you hold for 4 years is 6 bp per year. I don't see why that would chase all the long term investors out of the market. OTOH, 25 bp on something you'll hold for a month is 300 annualized. The tax is more likely to reduce that kind of activity. Maybe you feel that these firms get most of their volume from short term traders?

I expect that some of the proponents of this tax, and some of the opponents, have motives I don't agree with. But that's true about any piece of legislation. The key to me is what it actually does.

"We have the best stock market in the world". Did you see M Paquette's example? I read that and wonder how many more examples there are that I haven't seen.
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Old 12-11-2009, 01:08 PM   #44
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My bold - I'm quite sure we wouldn't go back to the market we had 50 years ago. Computers have changed all businesses. Most of the compression is bid/asked is probably due to better information flow. Maybe you know better, but I see lots of changes other than volume.
Let me try this example instead. What is easier to buy and sell, a stock or a house? A stock and the reason being because there are many more participants than when trying to buy/sell a house. This tax will eliminate countless participants and by default you will have a much more illiquid market.

Unless you have market participants, it doesn't matter how advanced your computers are. Heck, even today there are stocks on the Nasdaq that have spreads that are wider than 1/4. Why? Because these are small, illiquid stocks with very few market participants. This tax would copy that environment to most major stocks and have wider spreads as well.


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The bill (as I understand it) exempts the individuals who are trading with Scottrade, Etrade, and Shwab.
I don't think that's correct. As far as I know, the only thing that would be exempt are retirement accounts. But it begs the question, doesn't it, if this tax is so tiny and have no effect on anybody, then why the need to exempt retirement accounts? After all, we are told it is such a tiny tax.

At any rate, in reality nobody will be exempt. As samclem mentioned in his post above, research has shown that spreads will increase when this type of tax is introduced. And once they increase everybody will pay, irregardless of whether they are exempt or not.

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Even if they weren't, a 25 bp charge on a stock that you hold for 4 years is 6 bp per year. I don't see why that would chase all the long term investors out of the market. OTOH, 25 bp on something you'll hold for a month is 300 annualized. The tax is more likely to reduce that kind of activity. Maybe you feel that these firms get most of their volume from short term traders?
Exactly. The short term traders provide the volume. Once you kick them out of the market, long term investors will get worse pricing via widen spreads. Sure, if you are holding ABC company for 6 years you won't see a charge until you sell the stock when you pay the tax/wider spreads. But if you are mutual fund holder, you will pay this tax as an increased fee on a regular basis.



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"We have the best stock market in the world". Did you see M Paquette's example? I read that and wonder how many more examples there are that I haven't seen.
What I meant was that we have the most stocks in our markets in the world. They are the most liquid. There is no other country where corporations can raise capital in such an easy way as here in the US. Part of the reason is the liquidity in our stock market. Once you deny traders this liquidity, you are bound to make it harder for corporations to raise capital down the road. If they can't raise capital, then they can't buy equipment, hire people etc. Why would we want to go down this road where we are pushing investors/traders to foreign countries?

Finally, what most likely will end up happening is that companies such as Goldman Sachs, Morgan Stanley will be exempt from this tax as they are market makers and instead everybody else will pay. They have the lobbyists and can fight it, and I believe this is what was in the UK. How is that possibly fair?
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Old 12-11-2009, 01:11 PM   #45
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Impact on the NYSE (see last slide):
-- STT and volatility directly related (i.e. the tax increased volatility)
-- STT and liquidity were inversely related (i.e. more tax=less liquidity)
-- STT and market share inversely related (i.e. more tax= less business for the NYSE, stock volume moved to exchanges out of NY state. In the case of a US-wide STT, the implication is that foreign exchanges would benefit at the expense of the US.)
The last slide: "Regional exchanges – shares are fully fungible and the currency is identical between exchanges"

Since foreign exchanges don't have fungible shares, and there are currency issues, it doesn't follow that trading would off-shore. Hong Kong has -0- capital gains tax, yet the US has ample liquidity. Surely market share would've shriveled already? Saving >15%+ is a lot more incentive than saving <1%.
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Old 12-11-2009, 03:10 PM   #46
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Seems the regulatory legislation will probably satisfy congress's desire to do something about past disasters: http://www.nytimes.com/2009/12/12/bu...er=rss&emc=rss

My guess is the stock transaction tax will go nowhere.
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Old 12-11-2009, 04:31 PM   #47
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Your first paragraph says there are a lot more strategies. Do you have an opinion on whether they are a net positive or negative to long term investors? (The claim I quoted is that high-frequency traders are a net positive for the rest of us.)
They are a slight net negative for longer term investors, taking a cut of the action on buy and sell days. There's plenty of liquidity (trading volume) during each trading day from day traders and folks pursuing short term trading strategies.

I don't recall seeing any difficulty in the trades of index funds 10 years ago that might have been eased by these 'new and improved' high frequency activities introduced in the past decade.
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Old 12-11-2009, 06:01 PM   #48
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The last slide: "Regional exchanges – shares are fully fungible and the currency is identical between exchanges"

Since foreign exchanges don't have fungible shares, and there are currency issues, it doesn't follow that trading would off-shore. Hong Kong has -0- capital gains tax, yet the US has ample liquidity. Surely market share would've shriveled already? Saving >15%+ is a lot more incentive than saving <1%.
As was mentioned above, Sweden tried a similar transaction tax.

In January 1984, Sweden introduced a 50-basis-point tax on the purchase or sale of an equity security. In July 1986 the rate was doubled. With the 1986 announcement that the equity tax would double, 30% of the trading volume moved to London. By 1990, more than 50% of all Swedish trading had moved to London. Foreign investors reacted to the tax by moving their trading offshore while domestic investors reacted by reducing the number of their equity trades.
http://www.iimcal.ac.in/community/FinClub/art103.html

Why would the US be any different since investors can easily move to foreign exchanges? Unless this is agreed to by all countries, it would be unlikely to work.

Americans are taxed on their earnings on a worldwide basis, including capital gains. Thus, we couldn't simply move our trading to Hongkong to escape capital gains taxes. However, a hedge fund or other types of Wall Street firms can easily move their HQ's to Hongkong or wherever. But they are taxed differently than individuals. I assume what will happen in reality is that the "big boys" will either be exempt (as they are in the UK) or they will move abroad.

The 1% (or 0.25%) is per trade. So depending on how you invest, it can easily amount to much higher than 15%. This is why it would eliminate short-term traders as it would no longer make sense to trade on a ST-basis. And whatever people may think of ST-traders, they do provide liquidity in the market.

My 2 cents...
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Old 12-11-2009, 06:17 PM   #49
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So, did Sweden finally get wise and dump the tax?
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Old 12-11-2009, 06:28 PM   #50
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The last slide: "Regional exchanges – shares are fully fungible and the currency is identical between exchanges"

Since foreign exchanges don't have fungible shares, and there are currency issues, it doesn't follow that trading would off-shore. Hong Kong has -0- capital gains tax, yet the US has ample liquidity. Surely market share would've shriveled already? Saving >15%+ is a lot more incentive than saving <1%.
Foreigners living abroad pay no cap gains tax to the US if they trade on a US stock exchange.

What about the new proposed transaction tax? Here's a description of the "covered transactions":
Quote:
‘(e) Covered Transaction- The term ‘covered transaction’ means any purchase or sale if--

‘(1) such purchase or sale occurs on a trading facility located in the United States, or


‘(2) the purchaser or seller is a United States person.
So, foreign nationals would pay the tax if the sale occurred on a US exchange, and US citizens would pay the tax no matter where the sale of stocks occurred (I wonder how the IRS will enforce this?)

Bottom line: The cap gains tax does not swamp the impact of the new tax. The new tax would reduce the attractiveness of US exchanges to foreign traders (and foreign companies).
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Old 12-11-2009, 09:07 PM   #51
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Before getting all worked up over this bill from a representative from Oregon we should keep this in mind:
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Most bills never receive any committee consideration and are never reported out. House bills start in House committees and enter Senate committees only after being passed by the House and received by the Senate, and similarly for Senate bills.
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Old 12-11-2009, 09:23 PM   #52
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isbcal,
While what you say is true, this is a congress desperately looking for cash, with a pension to tax just about anything they can think of. Restrict retirement accounts, so the 'little guy' does not get hit, and you can sell it at taxing the 'wealthy'. Sounds like it right out of their play book to me.
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Old 12-12-2009, 08:22 AM   #53
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So, did Sweden finally get wise and dump the tax?
Yes, after less than eight years, they dumped it. And per article:

once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.

By the way, EU is now discussing implementing this tax. France and the UK are driving it. From what I have read, Sweden is now ironically adamantly opposed to it based on its own experience. I say ironically as Sweden is not exactly known as a tax haven. But this is one instance where we can look to Sweden's experience for wisdom.
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Old 12-12-2009, 10:26 AM   #54
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Before getting all worked up over this bill from a representative from Oregon we should keep this in mind:
There's already a companion bill being worked by Senator Tom Harkin (D) and Senator Bernie Sanders (I).

It's true that not all legislation makes it out of committee and through the process. It's also true that every terrible piece of legislation started just this same way.
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Old 12-12-2009, 12:26 PM   #55
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Let me try this example instead. What is easier to buy and sell, a stock or a house? A stock and the reason being because there are many more participants than when trying to buy/sell a house. This tax will eliminate countless participants and by default you will have a much more illiquid market.

Unless you have market participants, it doesn't matter how advanced your computers are. Heck, even today there are stocks on the Nasdaq that have spreads that are wider than 1/4. Why? Because these are small, illiquid stocks with very few market participants. This tax would copy that environment to most major stocks and have wider spreads as well.




I don't think that's correct. As far as I know, the only thing that would be exempt are retirement accounts. But it begs the question, doesn't it, if this tax is so tiny and have no effect on anybody, then why the need to exempt retirement accounts? After all, we are told it is such a tiny tax.

At any rate, in reality nobody will be exempt. As samclem mentioned in his post above, research has shown that spreads will increase when this type of tax is introduced. And once they increase everybody will pay, irregardless of whether they are exempt or not.



Exactly. The short term traders provide the volume. Once you kick them out of the market, long term investors will get worse pricing via widen spreads. Sure, if you are holding ABC company for 6 years you won't see a charge until you sell the stock when you pay the tax/wider spreads. But if you are mutual fund holder, you will pay this tax as an increased fee on a regular basis.





What I meant was that we have the most stocks in our markets in the world. They are the most liquid. There is no other country where corporations can raise capital in such an easy way as here in the US. Part of the reason is the liquidity in our stock market. Once you deny traders this liquidity, you are bound to make it harder for corporations to raise capital down the road. If they can't raise capital, then they can't buy equipment, hire people etc. Why would we want to go down this road where we are pushing investors/traders to foreign countries?

Finally, what most likely will end up happening is that companies such as Goldman Sachs, Morgan Stanley will be exempt from this tax as they are market makers and instead everybody else will pay. They have the lobbyists and can fight it, and I believe this is what was in the UK. How is that possibly fair?
I’m willing to accept the general direction – more trading means less cost per trade. But asked for numbers because I expect that the total cost goes up. I’ll try an example to show you what I’m thinking.

Market 1 is dominated by long term investors. A typical trade goes like this:

Investor A sells XYZ to market maker M at $50.00
Investor B buys XYZ from market maker M at $50.30
The $0.30 is the bid/asked spread. From A and B’s perspective, it’s frictional losses.

Market 2 has twice as many trades as market 1. Half the total trades are from short term traders. Due to the higher volume of trades, typical bid/asked spreads have dropped from $0.30 to $0.20. A typical trade between investors A and B looks like this:

Investor A sells XYZ to market maker M at $50.00
M sells XYZ to short term trader S at $50.20
S sells XYZ to market maker M’ at $50.35
M’ sells XYZ to investor B at $50.55

Notice that in Market 2 the volume of trades is higher, each bid/asked spread is lower, but the total frictional losses between investors A and B have increased from $0.30 to $0.55.

You may look at this and say “That’s not how it really works.” Fine, but I’m looking for an example with numbers that shows how it really works. In my world, S isn’t in the market at all unless he can cover his expenses and profit out of the difference between his selling and buying prices. That’s a drag on A and B that outweighs any value they get from additional liquidity.

I’m in favor of businesses being able to raise capital by selling stock. But note that the only time they get capital is when they sell new issues. Doubling the number of trades in the market increases liquidity, but by how much is that worth on a new issue? A new share that would have netted $50.00 to the issuing company now provides $50.01? $50.10?

In your last paragraph you say that giving market makers a pass isn’t “fair”. Could you explain this? Maybe the “fair” issue is between a “market maker” and a “short term trader”? I’m not sure if there is really a clear line between them anymore.

Regarding who’s exempt. I understand that this is in the “idea” stage. I got my information here
Quote:
To ensure that the law targets speculators and not pension funds or retirement investors, the tax would be refunded for tax-favored retirement accounts such as 401(k) plans and education and health savings accounts. Additionally, the tax would not apply to the first $100,000 of a trader's annual transactions.
Financial transaction tax sought to pay for job creation - Dec. 2, 2009
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