Eliot Spitzer: Tax the Traders! It Would Solve Economic Crisis and Stop Reckless Activity

[Vox Populi]

13. it's a dumb idea

This idea is not new - it's been tried before and it failed. Eliot Spitzer justs proves how ill-informed he is on how financial markets work.
If this tax is implemented as proposed, the immediate result will be a massive and permanent loss of transaction volume on US stock and commodities exchanges resulting in higher volatility because of fewer orders at each price. Trading will simply move to a more favorable location: UK, Sydney, Singapore, for example. The only people who will suffer because of this tax are people like you: small investors and people invested in mutual funds. Goldman Sachs won't pay the tax - they are exchange members and will be exempt. It is Goldman and other major banks who do the bulk of HFT transactions because they are the only ones for whom the frictional costs of trading are low enough to profit from trades lasting less than a couple of seconds.

The expected revenue from an FTT is ridiculous - based on assumptions that the transaction volume will not be substantially reduced, which is just flat-out wrong. If trading does not move abroad instantly, the guarnteed resultis that GSand others will simply invent a proxy for stock and commodity trades that mimic the underlying contracts but are themselves exempt from the FTT. This is what happened in UK - UK imposes a stamp duty on every stock transaction - except 70% of transactions are exempt - only the small investor pays them. So what do people in UK do if they wish to daytrade stocks? They buy CFD's (Contracts for difference) which are essentially just bets placed with a bookmaker and as there is no underlying asset transfer they are exempt from stamp duty.

I am sympathetic to the idea of making the bankers pay, but this FTT is not the right approach. It would be more palatable and would have the intended effect of reducing HFT if the transaction itself were assessed the fee as a flat amount (e.g. $0.001 per share or $0.10 per contract plus a fee for each order cancelled ) rather than being based on the underlying value of the asset. In this way only high volume traders would be impacted by the fee, while the small investor would barely notice.