4 ms·

The Need for a Tax on Financial Trading

34 points by hvo 11y ago

kasey_junk 11y ago
> However, individuals who buy and hold investments, including those who invest in index funds that trade infrequently Wait, how is that possible? Are the underlying trades that make up the index not taxed? Do the funds receive some sort exemption? If so, how do I become an entity like that? Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully). Wouldn't it be simpler to just tax the gains as we do now at a higher rate? [Later] On second thought this is even worse for folks like me (whether I count as "average" or not I don't know). Most of my trading portfolio exists in the form of index funds in tax deferred accounts. My long hold of those index funds now acts as a back door for lots of taxation that is less obvious.
- vostok 11y ago
  >Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully). I don't have a view on whether this is good or bad, but this is exactly what happens in one of the markets with a relatively high transaction tax.
- deleted 11y ago
  [deleted]
  - tomp 11y ago
    If the goal would be to slow down the market, you could simply... slow down the market. Genious, I know! For example, a mandatory delay for all orders. Or auctions every 1/2/5 minutes.
  - kasey_junk 11y ago
    > If the goal is to slow down the market, a transactional tax is needed The idea that a transaction tax will in anyway slow down the market is dubious to me, that said, if our goal is to limit the number of transactions, why don't we just pass a law that does that? Even if we did that, it still doesn't follow that it won't impact people who are invested in index funds...
- vanviegen 11y ago
  The difference is that individual investors will often hold on to their shares for months or years, rendering the trading tax insignificant. The tax is targeting (very) short-term professional traders, selling and buying back shares multiple times a day (or per second, in some cases). This type of trading adds little value to the useful allocation of capital, and imposes a 'tax' on other traders. To me, that sounds like as good a thing to tax as any. Besides, I'd guess that implementation of such a tax would be relatively straightforward, as far as taxes go.
  - kasey_junk 11y ago
    Except if I'm "holding" an index I'm not really holding anything. An index is made up of lots of trades over time. I'm dubious about every part of your argument, but even if I weren't it still doesn't hold that long term index "investors" aren't impacted by this.
dovdov 11y ago
also ex high speed trading supercomputers for sale
- brianwawok 11y ago
  Except most expensive trading stuff is ASICS and microwave links and low latency switches and stuff... not that many trading strategies need the supercomputer to run, as the math is pretty simple.
elecengin 11y ago
The trading tax has been hanging over the heads of traders for a long time now. I almost wish they would just create a proper experiment to test it and then repeal it after it inevitably fails (see Sweden for a prime example). The SEC seems to enjoy "experiments" - the large tick pilot (testing variations on requiring some small cap stocks to trade in increments larger than a penny) is an example of a massive upcoming one. While the large tick pilot suffers from many things - a huge cost to brokers for a dubiously structured experiment - at least it shows a willingness for the SEC to attempt structured experiments. This should be no different. P.S. For those interested in Sweden - a report considering a transaction tax in Canada that discusses it: http://www.publications.gc.ca/collections/Collection-R/LoPBdP/BP/bp419-e.htm http://www.publications.gc.ca/collections/Collection-R/LoPBd...
qpsk88 11y ago
i never quite understood, why they dropped it. The financial industry claims they produce products, so when buying selling them sales tax applies. For me as private investor (in germany) the tax added up to something like 2DM per year.
tomp 11y ago
Because barriers to trade have worked so great in the past... This is just another fluff piece without too many rational arguments, based on a completely irrational fear of HFT. Arguably, HFT and hedge fund have made the markets much more micro-efficient in the past decades (as wittnessed by the difficulty of finding new arbitrage opportunities); we have to thank the central banks and big institutional investors for macro-inefficiency. > one that applies a tiny tax rate to an array of transactions and is split between buyers and sellers I think the current situation, where exchanges basically "tax" those who take liquidity and reward those who provide it (i.e. the fee of a market order is split between the exchange and the person who entered the limit order) is much better at providing stability to the market. > which generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability Well, the idea behind is that prices (e.g. same stock on different markets) should converge. If you don't want that, by all means, tax the market. > The burden of this tax would be concentrated at the top, because that’s where the ownership of financial assets is concentrated Nope, it doesn't matter where ownership is concentrated. What matters is where trading is concentrated. E.g. HFT or every time you get paid and invest a portion in your income in a stock index-backed pension scheme.
- qpsk88 11y ago
  > I think the current situation, where exchanges basically "tax" those who take liquidity and reward those who provide it I like you explaination, but exchanges are nowadays mostly private companies so the 'tax' goes to shareholders and not to the state.
  - tomp 11y ago
    Exactly, which encourages competition - exchanges can either reduce this tax (earning less per trade, but encouraging more volume), or maybe even increase it (rewarding liquidity more, and so improving the trading process).
    - qpsk88 11y ago
      Point taken, but competion is not a value by itself, tax money is.
ohyes 11y ago
This is a stupid way to get a progressive tax system. If you want a progressive tax system just do it and don't mess around with complicated schemes to avoid the political consequences of it. Tax the wealthy at 60-70% and everyone else at 30-40% and provide decent social services and be done with it.
- sageikosa 11y ago
  ...and a huge bureaucracy so that we can be certain that the social services are decent (since we won't be able to gauge efficiency or utility by supply and demand market pricing)...then huge organized labor and pensioning systems to attract and vest people into a system... Since we already have these last two, then taxing the wealthy seems like a good way to go, except that you need to expand the concept of wealthy to actually make enough money; all the while the "wealthy" will find ways to protect their wealth. It might be easier to simply print more money and give it to government agencies, but then other nations will probably value your currency less due to inflationary bloat.
vostok 11y ago
It's not hard to see who benefits from these taxes. You avoid the tax by trading a swap/CFD/forward (outside the U.S., if necessary). This means that your market maker is a bank instead of an HFT firm. More of the order flow becomes internalized so there's less incentive to post competitive quotes on public exchanges. I think it's very telling that many of the articles talk about the evils of HFT without addressing internalization. It's true that this type of tax can easily be avoided, but the real problem is that it incentivizes trading to move from public exchanges to banks' walled gardens.
- kolbe 11y ago
  This is true. I'm consistently amused at how the transaction tax gets advertised with "BANKS HATE THIS," when banks would love it. And when banks love something, you better believe that it's not in anyone else's best interest.
cheatdeath 11y ago
It's interesting people always cite the UK's stamp duty on share transactions as an example for how to stop high frequency trading. The rate is 0.5% when buying and 0% when selling. Market makers (of which high frequency traders are a subset) do not pay this. http://www.legislation.gov.uk/ukpga/1997/16/section/97 http://www.legislation.gov.uk/ukpga/1997/16/section/97 Edited extract: "Stamp duty shall not be chargeable on an instrument transferring stock of a particular kind on sale to a person or his nominee if— (a)the person is a member of an exchange (b)the person is an intermediary" "an intermediary is a person who carries on a bona fide business of dealing in stock and does not carry on an excluded business"
yellowstuff 11y ago
I have trouble believing this assertion from the NYT: "[HFT] generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability" Considering this fact: "TABB Group estimates that US equity HFT revenues have declined from approximately $7.2 billion in 2009 to about $1.3 billion in 2014." Source: https://www.fas.org/sgp/crs/misc/R43608.pdf https://www.fas.org/sgp/crs/misc/R43608.pdf So the profit of the entire industry is a rounding error, but they're somehow fleecing everyone? And they provide tiny spreads, which clearly benefits individual investors. The NYT article says a FTT is necessary to protect from HFT, but they don't really have evidence of that. The study they link makes the case that a FTT would raise lots of revenue without distorting trading too badly, but admits that the effect on market volatility is unclear. But raising taxes so that the government makes more money is not going to be as good a slogan as raising them to punish some hyped-up evil doer.
devnull791101 11y ago
FTT's are bad. There are no models which show that they generate any revenue having been extensively researched in both the EU and UK. The basic rule is that the more you tax something the less of it occurs. FTT's are not only extremely expensive taxes to administer they also reduce overall economic activity and have been overturned everywhere they have been tried.

34 points by hvo 11y ago

> However, individuals who buy and hold investments, including those who invest in index funds that trade infrequently Wait, how is that possible? Are the underlying trades that make up the index not taxed? Do the funds receive some sort exemption? If so, how do I become an entity like that? Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully). Wouldn't it be simpler to just tax the gains as we do now at a higher rate? [Later] On second thought this is even worse for folks like me (whether I count as "average" or not I don't know). Most of my trading portfolio exists in the form of index funds in tax deferred accounts. My long hold of those index funds now acts as a back door for lots of taxation that is less obvious.

vostok 11y ago
>Seems to me that as an "average" investor I'm going to get taxed 3 times now. The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully). I don't have a view on whether this is good or bad, but this is exactly what happens in one of the markets with a relatively high transaction tax.
deleted 11y ago
[deleted]
- tomp 11y ago
  If the goal would be to slow down the market, you could simply... slow down the market. Genious, I know! For example, a mandatory delay for all orders. Or auctions every 1/2/5 minutes.
- kasey_junk 11y ago
  > If the goal is to slow down the market, a transactional tax is needed The idea that a transaction tax will in anyway slow down the market is dubious to me, that said, if our goal is to limit the number of transactions, why don't we just pass a law that does that? Even if we did that, it still doesn't follow that it won't impact people who are invested in index funds...
vanviegen 11y ago
The difference is that individual investors will often hold on to their shares for months or years, rendering the trading tax insignificant. The tax is targeting (very) short-term professional traders, selling and buying back shares multiple times a day (or per second, in some cases). This type of trading adds little value to the useful allocation of capital, and imposes a 'tax' on other traders. To me, that sounds like as good a thing to tax as any. Besides, I'd guess that implementation of such a tax would be relatively straightforward, as far as taxes go.
- kasey_junk 11y ago
  Except if I'm "holding" an index I'm not really holding anything. An index is made up of lots of trades over time. I'm dubious about every part of your argument, but even if I weren't it still doesn't hold that long term index "investors" aren't impacted by this.

dovdov 11y ago

also ex high speed trading supercomputers for sale

brianwawok 11y ago
Except most expensive trading stuff is ASICS and microwave links and low latency switches and stuff... not that many trading strategies need the supercomputer to run, as the math is pretty simple.

elecengin 11y ago

The trading tax has been hanging over the heads of traders for a long time now. I almost wish they would just create a proper experiment to test it and then repeal it after it inevitably fails (see Sweden for a prime example). The SEC seems to enjoy "experiments" - the large tick pilot (testing variations on requiring some small cap stocks to trade in increments larger than a penny) is an example of a massive upcoming one. While the large tick pilot suffers from many things - a huge cost to brokers for a dubiously structured experiment - at least it shows a willingness for the SEC to attempt structured experiments. This should be no different. P.S. For those interested in Sweden - a report considering a transaction tax in Canada that discusses it: http://www.publications.gc.ca/collections/Collection-R/LoPBdP/BP/bp419-e.htm http://www.publications.gc.ca/collections/Collection-R/LoPBd...

qpsk88 11y ago

i never quite understood, why they dropped it. The financial industry claims they produce products, so when buying selling them sales tax applies. For me as private investor (in germany) the tax added up to something like 2DM per year.

tomp 11y ago

Because barriers to trade have worked so great in the past... This is just another fluff piece without too many rational arguments, based on a completely irrational fear of HFT. Arguably, HFT and hedge fund have made the markets much more micro-efficient in the past decades (as wittnessed by the difficulty of finding new arbitrage opportunities); we have to thank the central banks and big institutional investors for macro-inefficiency. > one that applies a tiny tax rate to an array of transactions and is split between buyers and sellers I think the current situation, where exchanges basically "tax" those who take liquidity and reward those who provide it (i.e. the fee of a market order is split between the exchange and the person who entered the limit order) is much better at providing stability to the market. > which generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability Well, the idea behind is that prices (e.g. same stock on different markets) should converge. If you don't want that, by all means, tax the market. > The burden of this tax would be concentrated at the top, because that’s where the ownership of financial assets is concentrated Nope, it doesn't matter where ownership is concentrated. What matters is where trading is concentrated. E.g. HFT or every time you get paid and invest a portion in your income in a stock index-backed pension scheme.

qpsk88 11y ago
> I think the current situation, where exchanges basically "tax" those who take liquidity and reward those who provide it I like you explaination, but exchanges are nowadays mostly private companies so the 'tax' goes to shareholders and not to the state.
- tomp 11y ago
  Exactly, which encourages competition - exchanges can either reduce this tax (earning less per trade, but encouraging more volume), or maybe even increase it (rewarding liquidity more, and so improving the trading process).
  - qpsk88 11y ago
    Point taken, but competion is not a value by itself, tax money is.

ohyes 11y ago

This is a stupid way to get a progressive tax system. If you want a progressive tax system just do it and don't mess around with complicated schemes to avoid the political consequences of it. Tax the wealthy at 60-70% and everyone else at 30-40% and provide decent social services and be done with it.

sageikosa 11y ago
...and a huge bureaucracy so that we can be certain that the social services are decent (since we won't be able to gauge efficiency or utility by supply and demand market pricing)...then huge organized labor and pensioning systems to attract and vest people into a system... Since we already have these last two, then taxing the wealthy seems like a good way to go, except that you need to expand the concept of wealthy to actually make enough money; all the while the "wealthy" will find ways to protect their wealth. It might be easier to simply print more money and give it to government agencies, but then other nations will probably value your currency less due to inflationary bloat.

vostok 11y ago

It's not hard to see who benefits from these taxes. You avoid the tax by trading a swap/CFD/forward (outside the U.S., if necessary). This means that your market maker is a bank instead of an HFT firm. More of the order flow becomes internalized so there's less incentive to post competitive quotes on public exchanges. I think it's very telling that many of the articles talk about the evils of HFT without addressing internalization. It's true that this type of tax can easily be avoided, but the real problem is that it incentivizes trading to move from public exchanges to banks' walled gardens.

kolbe 11y ago
This is true. I'm consistently amused at how the transaction tax gets advertised with "BANKS HATE THIS," when banks would love it. And when banks love something, you better believe that it's not in anyone else's best interest.

cheatdeath 11y ago

It's interesting people always cite the UK's stamp duty on share transactions as an example for how to stop high frequency trading. The rate is 0.5% when buying and 0% when selling. Market makers (of which high frequency traders are a subset) do not pay this. http://www.legislation.gov.uk/ukpga/1997/16/section/97 http://www.legislation.gov.uk/ukpga/1997/16/section/97 Edited extract: "Stamp duty shall not be chargeable on an instrument transferring stock of a particular kind on sale to a person or his nominee if— (a)the person is a member of an exchange (b)the person is an intermediary" "an intermediary is a person who carries on a bona fide business of dealing in stock and does not carry on an excluded business"

yellowstuff 11y ago

I have trouble believing this assertion from the NYT: "[HFT] generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability" Considering this fact: "TABB Group estimates that US equity HFT revenues have declined from approximately $7.2 billion in 2009 to about $1.3 billion in 2014." Source: https://www.fas.org/sgp/crs/misc/R43608.pdf https://www.fas.org/sgp/crs/misc/R43608.pdf So the profit of the entire industry is a rounding error, but they're somehow fleecing everyone? And they provide tiny spreads, which clearly benefits individual investors. The NYT article says a FTT is necessary to protect from HFT, but they don't really have evidence of that. The study they link makes the case that a FTT would raise lots of revenue without distorting trading too badly, but admits that the effect on market volatility is unclear. But raising taxes so that the government makes more money is not going to be as good a slogan as raising them to punish some hyped-up evil doer.

devnull791101 11y ago

FTT's are bad. There are no models which show that they generate any revenue having been extensively researched in both the EU and UK. The basic rule is that the more you tax something the less of it occurs. FTT's are not only extremely expensive taxes to administer they also reduce overall economic activity and have been overturned everywhere they have been tried.