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Simple solution. Penny a share transfer tax for all trades. Corresponding amounts on bonds and other instruments. Watch the amazing reduction in volume and vola

by T_S_ 15y ago

Simple solution. Penny a share transfer tax for all trades. Corresponding amounts on bonds and other instruments. Watch the amazing reduction in volume and volatility. Then watch the return to focus on value trading. Like that idea? Next, open up public companies books. Not in the formal but phony SEC/GAAP way. No, I mean realtime journal entries. I will do the accounting myself. You can too. Link the trading tax to how often the company updates its numbers. Want more liquidity for your stock? Give more information. Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available. Now all those things would make finance productive again by putting the focus back on capital allocation and moving it away from trading, speculation and lies. Make regulators focus on enforcing real transparency, since they don't know how to regulate behavior. This takes away the upside from the regulator/industry revolving door. It would be a great world for analysts and investors. In olden days (1980) all this would have been technically infeasible. Now we have the computing power to handle it.

deleted 15y ago
[deleted]
jrockway 15y ago
Penny a share transfer tax for all trades. What's a "share"? Equities are one of many financial markets, but not the only one and not necessarily the most important. People trade bonds, treasuries, foreign currencies, commodities, interest rates and various derivatives on top of these securities: equity options, FX options, interest rate swap options, FX forwards, etc., etc. How would you tax options contracts? Tax when exercised? But you wanted it to be a trade tax, so should it be a dollar per standard contract? Your model is too simple and does not reflect the reality of the financial markets. And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire. Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available. Why do companies have to have "a model"? You wouldn't ask da Vinci for the "code" behind the Mona Lisa; why should accounting be automatically less creative than painting? All regulations will do is force companies to get money from source other than a public offering -- private investment, bond issues, etc. Anyway, I'm not saying that taxing trades is a bad idea, I'm saying that your idea doesn't make much sense in the real world. Communism is a good idea. On paper.
- Cushman 15y ago
  I'm with you aside from this: "why should accounting be automatically less creative than painting?" I'm sure you don't mean what it looks like, but I can't imagine what that could mean.
  - jrockway 15y ago
    Why can't your "gut" be involved in forecasting the success of your company? People often come up with the right answer without knowing how; making them write down every assumption they made while coming up with an answer would make coming up with an answer impossible. The real world is not 9th grade math.
    - Cushman 15y ago
      People often come up with the wrong answer without knowing how, too. They just forget about those times. It's been well documented— your perception of the "real world" is heavily distorted. That's why we have math— to figure out the right answer despite human biases.
    - T_S_ 15y ago
      My point was about forward looking statements and inducing companies to reveal their rational processes. So by all means, use your gut. Then show your work. People can then bet on your gut. Or somebody else's work.
    - qntm 15y ago
      Just forcing a company to say "We expect X amount of growth in the next financial quarter, and the reason we expect this amount of growth is - even though we are an international financial corporation - guesswork and gut feeling, rather than any kind of formal model" would be a step forward. You have two companies. Both predict X growth. One provides a full model which backs up their prediction. The other flat-out states that they made the number up. Which would you pick? It doesn't actually matter - the point is that their operations are more transparent and your choice is more informed.
  - 15y ago
throwaway1129 15y ago
Re "penny a share transfer tax", the UK already does this, it's called the "stamp tax." Unfortunately, they exempted a few large institutions from the tax, so everyone trades derivative instruments managed by these institutions who don't pay the tax. You only pay the tax if you're stupid.
- T_S_ 15y ago
  Great point. No exemptions. Otherwise no point to the tax.
d2 15y ago
I think the spirit of your idea of a per transaction tax on financial products is a good one. I would balance the increase in government revenue with a reduction in tax on capital gains held more than 5 years as Cuban suggests.
- T_S_ 15y ago
  Amendment accepted ;-)
dkarl 15y ago
Trying to understand a company's finances from its internal books is foolhardy unless the company volunteers to train you up to the standards of its own accountants. Protecting investors from the idiosyncratic and often misleading nature of a company's internal books is the entire reason for GAAP's existence in the first place.
- T_S_ 15y ago
  Actually I am suggesting something more innovative (radical/extreme?) to companies. Toss away those GAAP crutches, and confess to the congregation all your transactions--realtime. Enter the kingdom of Real Transparency (TM). I don't need your accountants, only your auditors. Imagine for a minute what that would do to the business of financial analysis. It would add real value, unlike today.
  - dkarl 15y ago
    Transparency doesn't mean anything if you're just looking at a stream of symbols that have no standardized meaning. Companies can make anything look good through creative terminology when they aren't held to strict standards such as GAAP. Internal books kept to internal standards simply aren't helpful to people who aren't privy to the processes by which they're kept, even if you deliver the transactions at 21st-century speed through a 21st-century firehose.
    - T_S_ 15y ago
      The meaning of a transaction is generally understood. All I am saying is anything that would merit a journal entry gets feed through pipe instead of consolidated and reported months (or years!) later. I will do my own accounting, you can too.
  - wtvanhest 15y ago
    This idea is interesting, but you still need to figure out how to account for those transactions. In today's system of accounting a transaction can take many different forms with radical implications: For example: Company A sells product to Company B. When is cash exchanged? When is the product delivered? How much interest if any is part of the transaction? etc. What may be required to implement your idea would be to create a new system of accounting that has more depth than traditional accounting (Accrual Accounting). *Also, what is "business of financial analysis"? There is no such business. There are many businesses that implement financial analysis, and all of them add value to the economy and to their clients, investors etc.
vaksel 15y ago
I'd also like a ban on shorting. Noone should benefit from sabotaging a company. It's way too easy to drive the price of a stock down...the slightest rumor sends them into free fall. Granted it wouldn't solve much. Wall Street could just as well drive the price of a stock down with a false rumor, then buy up the stock at a discount before it rebounded. But at the very least, they wouldn't make twice as much on each transaction.
- T_S_ 15y ago
  Actually I disagree. Shorts one of the few cures for bubbles that we have and they are weakened greatly by institutional rules that favor promotion over rationality. But, and this is a big one, we would have to reveal trading positions daily to banish all speculation.
- prostoalex 15y ago
  Large short ratio is the first sign something is amiss. In an environment with imperfect information, someone knows more than the news on the company press releases page.
- MrMan 15y ago
  strongly disagree
- damoncali 15y ago
  I think you're equating short selling with fraudulent market manipulation. Short selling has no soul - flipping the buy-then-sell to sell-then-buy ( that is, shorting ) merely allows the pessimists to place their bets along side the optimists, and the markets are better off for it. A great read on the subject: http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-populism-runs-amok/ http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-...
benmccann 15y ago
A penny per share tax would price small investors out of the market. If there were a penny per share tax then corporations would reverse split their shares so that a penny is nothing relative to the share price of their equity. I don't think you really want all stock to be as expensive as Berkshire Hathaway.
- joezydeco 15y ago
  How many shares do you think small investors buy at a time? If I buy 30 shares of Broadcom @ 32.00 on ETrade (their commission is $9.99), my total price goes from 969.99 to 970.29. If BRCM reverses 30:1, I save $0.29? I'd think large companies would rather see the price stay affordable. BRK.A/B is a totally different animal.
- ori_b 15y ago
  To curb high frequency trading, a dollar per transaction would also work. For large trades, this would be neglegible, but if you're doing tens of thousands of them a day, it would add up.
wisty 15y ago
In a similar spirit, allow automated trading to take place, but only if the code and underlying data sets is open sourced after 5 (or 10?) years. If you need manual intervention (i.e. gut estimates) to feed into the automated trade, it must be logged, and will be made publicly available at the same time as the code. There will also be a lag of 1 second. As a carrot, servers with logged code can be co-located with the exchange, for a small fee. As a stick, anything outside the exchange gets the 1 second lag.
pathik 15y ago
It's called the Tobin tax. One of the best ways to stop significantly reduce HFT.
Benjo 15y ago
This or a hundred other solutions. There's no political will to do it, because designing more efficient systems does not get you reelected.
nomurrcy 15y ago
Another idea (sans - or in addition to a tax) to improve the signal / noise ratio of the markets: mandate that all B/Os put out there have a TTL of 5 seconds or until they are hit. So if you Bid at X, you can't pull that bid 10 microseconds later. You can't quote stuff / probe with orders you never expect to get hit. You can't create the appearance of 'market depth' where none exists at all.
- T_S_ 15y ago
  Exactly. You are feeding false information into the system. Limiting the trading to epochs and holding orders levels the playing field.
nvarsj 15y ago
You have to be really careful with such taxes. Take for instance India: the Indian government places a tax on the exercise of any option. This doesn't stop HFT at all - it simply makes it more favorable to trade out of a position before exercise. My guess is it mostly hurts the business owner/investor trying to hedge risk. Likewise, a fee on a stock trade would probably have little effect on banks like GS, etc. I imagine it would instead discourage trading through public exchanges and widen spreads - all things that are bad for the little guy.

by T_S_ 15y ago

deleted 15y ago

[deleted]

jrockway 15y ago

Penny a share transfer tax for all trades. What's a "share"? Equities are one of many financial markets, but not the only one and not necessarily the most important. People trade bonds, treasuries, foreign currencies, commodities, interest rates and various derivatives on top of these securities: equity options, FX options, interest rate swap options, FX forwards, etc., etc. How would you tax options contracts? Tax when exercised? But you wanted it to be a trade tax, so should it be a dollar per standard contract? Your model is too simple and does not reflect the reality of the financial markets. And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire. Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available. Why do companies have to have "a model"? You wouldn't ask da Vinci for the "code" behind the Mona Lisa; why should accounting be automatically less creative than painting? All regulations will do is force companies to get money from source other than a public offering -- private investment, bond issues, etc. Anyway, I'm not saying that taxing trades is a bad idea, I'm saying that your idea doesn't make much sense in the real world. Communism is a good idea. On paper.

Cushman 15y ago
I'm with you aside from this: "why should accounting be automatically less creative than painting?" I'm sure you don't mean what it looks like, but I can't imagine what that could mean.
- jrockway 15y ago
  Why can't your "gut" be involved in forecasting the success of your company? People often come up with the right answer without knowing how; making them write down every assumption they made while coming up with an answer would make coming up with an answer impossible. The real world is not 9th grade math.
  - Cushman 15y ago
    People often come up with the wrong answer without knowing how, too. They just forget about those times. It's been well documented— your perception of the "real world" is heavily distorted. That's why we have math— to figure out the right answer despite human biases.
  - T_S_ 15y ago
    My point was about forward looking statements and inducing companies to reveal their rational processes. So by all means, use your gut. Then show your work. People can then bet on your gut. Or somebody else's work.
  - qntm 15y ago
    Just forcing a company to say "We expect X amount of growth in the next financial quarter, and the reason we expect this amount of growth is - even though we are an international financial corporation - guesswork and gut feeling, rather than any kind of formal model" would be a step forward. You have two companies. Both predict X growth. One provides a full model which backs up their prediction. The other flat-out states that they made the number up. Which would you pick? It doesn't actually matter - the point is that their operations are more transparent and your choice is more informed.
- 15y ago

throwaway1129 15y ago

Re "penny a share transfer tax", the UK already does this, it's called the "stamp tax." Unfortunately, they exempted a few large institutions from the tax, so everyone trades derivative instruments managed by these institutions who don't pay the tax. You only pay the tax if you're stupid.

T_S_ 15y ago
Great point. No exemptions. Otherwise no point to the tax.

d2 15y ago

I think the spirit of your idea of a per transaction tax on financial products is a good one. I would balance the increase in government revenue with a reduction in tax on capital gains held more than 5 years as Cuban suggests.

T_S_ 15y ago
Amendment accepted ;-)

dkarl 15y ago

Trying to understand a company's finances from its internal books is foolhardy unless the company volunteers to train you up to the standards of its own accountants. Protecting investors from the idiosyncratic and often misleading nature of a company's internal books is the entire reason for GAAP's existence in the first place.

T_S_ 15y ago
Actually I am suggesting something more innovative (radical/extreme?) to companies. Toss away those GAAP crutches, and confess to the congregation all your transactions--realtime. Enter the kingdom of Real Transparency (TM). I don't need your accountants, only your auditors. Imagine for a minute what that would do to the business of financial analysis. It would add real value, unlike today.
- dkarl 15y ago
  Transparency doesn't mean anything if you're just looking at a stream of symbols that have no standardized meaning. Companies can make anything look good through creative terminology when they aren't held to strict standards such as GAAP. Internal books kept to internal standards simply aren't helpful to people who aren't privy to the processes by which they're kept, even if you deliver the transactions at 21st-century speed through a 21st-century firehose.
  - T_S_ 15y ago
    The meaning of a transaction is generally understood. All I am saying is anything that would merit a journal entry gets feed through pipe instead of consolidated and reported months (or years!) later. I will do my own accounting, you can too.
- wtvanhest 15y ago
  This idea is interesting, but you still need to figure out how to account for those transactions. In today's system of accounting a transaction can take many different forms with radical implications: For example: Company A sells product to Company B. When is cash exchanged? When is the product delivered? How much interest if any is part of the transaction? etc. What may be required to implement your idea would be to create a new system of accounting that has more depth than traditional accounting (Accrual Accounting). *Also, what is "business of financial analysis"? There is no such business. There are many businesses that implement financial analysis, and all of them add value to the economy and to their clients, investors etc.

vaksel 15y ago

I'd also like a ban on shorting. Noone should benefit from sabotaging a company. It's way too easy to drive the price of a stock down...the slightest rumor sends them into free fall. Granted it wouldn't solve much. Wall Street could just as well drive the price of a stock down with a false rumor, then buy up the stock at a discount before it rebounded. But at the very least, they wouldn't make twice as much on each transaction.

T_S_ 15y ago
Actually I disagree. Shorts one of the few cures for bubbles that we have and they are weakened greatly by institutional rules that favor promotion over rationality. But, and this is a big one, we would have to reveal trading positions daily to banish all speculation.
prostoalex 15y ago
Large short ratio is the first sign something is amiss. In an environment with imperfect information, someone knows more than the news on the company press releases page.
MrMan 15y ago
strongly disagree
damoncali 15y ago
I think you're equating short selling with fraudulent market manipulation. Short selling has no soul - flipping the buy-then-sell to sell-then-buy ( that is, shorting ) merely allows the pessimists to place their bets along side the optimists, and the markets are better off for it. A great read on the subject: http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-populism-runs-amok/ http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-...

benmccann 15y ago

A penny per share tax would price small investors out of the market. If there were a penny per share tax then corporations would reverse split their shares so that a penny is nothing relative to the share price of their equity. I don't think you really want all stock to be as expensive as Berkshire Hathaway.

joezydeco 15y ago
How many shares do you think small investors buy at a time? If I buy 30 shares of Broadcom @ 32.00 on ETrade (their commission is $9.99), my total price goes from 969.99 to 970.29. If BRCM reverses 30:1, I save $0.29? I'd think large companies would rather see the price stay affordable. BRK.A/B is a totally different animal.
ori_b 15y ago
To curb high frequency trading, a dollar per transaction would also work. For large trades, this would be neglegible, but if you're doing tens of thousands of them a day, it would add up.

wisty 15y ago

In a similar spirit, allow automated trading to take place, but only if the code and underlying data sets is open sourced after 5 (or 10?) years. If you need manual intervention (i.e. gut estimates) to feed into the automated trade, it must be logged, and will be made publicly available at the same time as the code. There will also be a lag of 1 second. As a carrot, servers with logged code can be co-located with the exchange, for a small fee. As a stick, anything outside the exchange gets the 1 second lag.

pathik 15y ago

It's called the Tobin tax. One of the best ways to stop significantly reduce HFT.

Benjo 15y ago

This or a hundred other solutions. There's no political will to do it, because designing more efficient systems does not get you reelected.

nomurrcy 15y ago

Another idea (sans - or in addition to a tax) to improve the signal / noise ratio of the markets: mandate that all B/Os put out there have a TTL of 5 seconds or until they are hit. So if you Bid at X, you can't pull that bid 10 microseconds later. You can't quote stuff / probe with orders you never expect to get hit. You can't create the appearance of 'market depth' where none exists at all.

T_S_ 15y ago
Exactly. You are feeding false information into the system. Limiting the trading to epochs and holding orders levels the playing field.

nvarsj 15y ago

You have to be really careful with such taxes. Take for instance India: the Indian government places a tax on the exercise of any option. This doesn't stop HFT at all - it simply makes it more favorable to trade out of a position before exercise. My guess is it mostly hurts the business owner/investor trying to hedge risk. Likewise, a fee on a stock trade would probably have little effect on banks like GS, etc. I imagine it would instead discourage trading through public exchanges and widen spreads - all things that are bad for the little guy.