I am aware of several large hedge funds that would move their operations overseas if this measure passed. If I am aware of some, I am sure there are hundreds more.
Think of the implications on traders thinking about stepping into a plunging market to buy. With this transaction tax who would want to step in? It sure won’t be the LTBH clowns because they would already be in.
Right now shorts and short-term traders are the only ones who might step into plunging markets. The former to cover shorts, the latter to take a chance. Both provide much needed liquidity. The traders could count on a stop loss nearby where they can exit if wrong.
If this bill were to pass, there will be no one willing to step into plunging markets. Liquidity would immediately dry up.
The stock market is irrational. It has been going up hasn’t it? Speculators are driving it again in the face of continuing bad economic news: 1.The economy is not improving in a traditional way, 2. Real jobs are not being created 3. The debt continues to increase as a percentage of GDP – payback is impossible without destroying the economy, 4. The dollar is sinking and will continue to do so as long as the printing presses keep smoking 5. China, Arabia et al will not tolerate this much longer 6 Fiscal policy is managed by congressional and administration cretins.
Think of Germany after World War I. Why can’t we learn from history? As the sign in an IBM office stated, “THIMK”.
athan-asi-us,
Actually its not speculation driving up the financial markets,; it’s inflation. There is an ocean of newly printed money out there. It has been piling up because the consumer sector is pretty tight right now between depression level unemployment and the deleveraging on the part of those still employed. But money can only build up for so long before it starts to move.
[url=http://ad-orientem.blogspot.com/2009/11/what-does-tsunami-look-like.html]See these charts[/url]
All of this new money is desperately looking for a place to go. Hence we see bonds, equities and commodities all rising together (which should not normally occur). The rise in stock prices and commodities is simply the tip of the inflation iceberg that we are steaming towards at full speed.
In ICXC
John
P.S. I love your SN.
This tax has been introduced, in various forms, for a number of years by Rep. DeFazio. Earlier this year is was called the “Let Wall Street Pay for Wall Street’s Bailout Act.” Rep. DeFazio, when queried about the effect it would have on small traders who try to make their living from the markets, said that day traders don’t add anything to the economy and should go out and get a real job. Mr. DeFazio seems to have a real dislike for the trading of financial instruments and the people who do it. When properly regulated, such trading really does act to provide liquidity and orderly markets.
For those of use who are trying to keep our heads above water by eking out a modest living by trading, this tax will put us out of business. It sounds so modest at just .25%, but that .25% is on the total value of the financial instrument. If I try to hedge against a potential loss to my mutual fund holding by buying or selling S&P e-mini futures, I make $12.50 for each one point move the index goes in my favor, and I have to have around $5000 dollars in my account to hold a position overnight. Unfortunately the “value” of one future contract is now around $55,000 (50 time the S&P index) so I pay 0.25% when I open my position and 0.25% when I close my position. That’s $275 for each contract I trade, or a 22 point move in the index (which almost never happens) just to break even.
That is just one example of why this is a ridiculous idea. To quote Ronald Reagan “Governments don’t reduce deficits by raising taxes on the people; governments reduce deficits by controlling spending and stimulating new wealth.”
The government of this country has gone insane. My state has just released a report on the plan for the state to enact a new “carbon tax” in the next session of the Legislature to reduce “greenhouse gas emissions” to improve our state’s environment. The report itself predicts a cost of this new tax of approximately $800 per annum for every man, woman and child. Of course, the tax has nothing to do with the environment, it will simply be used to balance the state budget deficit.
And american companies wouldn’t just trade as adrs in canada because….?
I’m not particularly impressed by the day trader argument. Those who are constantly buying and selling stocks and commodities are not investing in the economy but are gamblers speculating on the markets instead of the roulette wheel. And ultimately it harms the real investors by greatly increasing the volatility of the markets. Market speculation was certainly a factor in the $150/barrel oil prices–and the collapse of that bubble to $30/barrel, at which price exploration isn’t profitable.
The chaos created by speculators who are constantly churning financial instruments is one reason my funds will not let me buy shares in a fund for two months after I’ve sold shares in that fund. And in some very volatile funds, like Vanguard’s REIT Index Fund, there is a penalty charged when shares held less than two months are sold.
And yes, I don’t like the idea of the transaction tax because it would increase the cost and decrease the profitability of my index funds which are broad based long term investments in the economy.
Maybe a better idea would be a graduated transaction tax on the sale of equities and futures.
P.S., by “graduated transaction tax I have in mind a tax rate that declines the longer the instrument is held. It would be highest for instruments held for less than a day and be 0.0% for instruments held for years.
One of the big reasons mutual funds don’t like you going in and out like that is the havoc it creates for accounting, more than anything. At least according to some of my peers who are on the low-rung “front lines” of fund administration. For things like that, use an exchange traded fund. The fund doesn’t have to go out and buy securities with your ne wmoney, and sell them when you leave, but rather you’re buying a preexisting bundle of securities. Can be very efficient for short-term holdings. I use them as “financial grease” when I’ve got to preserve liquidity for a client for some reason, but don’t want to be out of the markets. Vanguard-type index funds are great for long temr holdings, but ETFs are where it’s at for “parking” money for a few days/weeks.
The short term traders are very much needed, as Daniel said, for liquidity. Whenever you want to pull money from your mutual fund, they then go sell the underlying assets, and SOMEONE has to be found to buy those assets. Short term folks provide a lot of the slack between two long-term buyers, making the markets MUCH more efficient.
This whole proposal clearly comes from someone who doesn’t have the least clue.
Ad hominem arguments are illogical arguments besides being rude. You don’t have any knowledge of whether or not I “have the least clue.”
The reason mutual funds do not like you churning the funds is that it adds to the administrative costs of the fund, which affects everyone participating in the fund. Your buddies can dismiss that as “creating havoc for accounting”, but the reality is that it costs money for them to buy and sell the underlying instruments, and that costs everyone participating in the fund. Notice: there is usually no restriction on withdrawing funds from most mutual funds, except for some which are very volatile like the Vanguard REIT Index–and there the fee is only if shares held less than one year are sold (i.e., one is speculating short term). The other reason they discourage churning shares is that if there is a lot of that going on, it makes it difficult to maintain the target mix of instruments.
One can, of course, rationalize the economic benefits of short term traders. One can also rationalize the economic benefits of the casinos; after all, they provide employment for thousands of men and women. But it isn’t investing in the economic growth of the nation. And it does cause boom and bust cycles.
#9, I wasn’t attacking you. You said you didn’t like the bill. It’s Rep. DeFazio who lacks a clue.
Your second paragraph more or less explains what we call havoc in the accounting. It throws off ratios they’ve been fine-tuning all day when I send down a $20mm order (to buy or sell) an hour or two before close. And if I just bought the thing a few days before I get a “what gives?” call, sometimes from the grunts and sometimes from the fund managers. I am WELL aware of what goes on behind the scenes who you buy or sell shares of a fund.
Your distaste for short term trading does not change the facts of the situation, however.
A 2% tax seems like the house edge in a casino. Play long enough and the house eventually takes all your money. NO!