“Trading” priorities

In a recent NY Times op-ed, Bob Herbert argues for a financial transactions tax to raise revenue, and curb speculation. He notes, “This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately”. He quotes Dean Baker (co-director, Center for Economic and Policy Research, Washington) to explain, “It raises money in a way that comes primarily at the expense of speculation …The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay … It’s a very progressive tax that discourages nonproductive activity [emphasis added]”.

In India, while we have Securities Transaction Tax (STT), it is a paltry .125% and deductible as a business expense; short term capital gain tax is only 15% (up from 10% last year). Both of these do little to curb speculation (India has one of the highest trading volume to total market cap). However, this is an economic policy point and somewhat tangential. The more central point is that shouldn’t we as a society worry about the the colossal waste (and warped incentives) of bright minds in India, lured by the easy money and the pseudo-intelligence of speculation, be it in real estate or trading puts and calls in the stock market. How can we justify making money on the stock market simply based on hunches/knowledge of which way a stock/market will go in a certain period. That’s not the underlying tenet of the stock market – of fueling investment in companies that produce valuable goods and services in the economy. Nowhere in the world are the short-term gyrations of the stock market based on any rational understanding of the fundamentals. Yet, we idolize, envy, and emulate the traders who make a ton of money through speculation. Paul Krugman (’08 Economics Nobel) notes “There’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing”.

Personally, I feel that a preponderance of those who acquire such off-the-graph gains are either lucky (riding the wave) and/or unethical (active collusion). And we shouldn’t encourage or glorify those who make personal gains at the society’s expense.


2 responses to ““Trading” priorities

  1. Traders provide liquidity to the markets. Basically, they are market makers. Without liquidity, who will buy all those millions of shares of stock when the mutual fund that has YOUR money tries to sell the stock? Not only will all investors (401K accounts) lose money from this tax, but they will also lose even more money as stocks will drop significantly more when investors want to sell but there are few buyers.

    Not only that, but with the Madoff scandal in December, many investors already don’t trust nor want to invest in the markets. This tax would only make this worse. U.S. more than any other country relies on capital.

    How many jobs were lost in the last four months of last year? Do you know how many jobs would be affected when hundreds of thousands of traders suddenly stopped trading?

    What about hedge funds? They are speculators, but they also invest for longer term. Hedge funds would go out of business overnight. Wealthy americans have huge investments in hedge funds.

    It’s a shame that some people are not able to gauge risk vs. reward. Is $100 billion per year really worth potentially large market disruption, in addition to job losses, and investment capital leaving U.S. markets?

    Why not just raise short term capital gains tax? Traders would have to pay more taxes, but they would still provide liquidity and would not be standing in unemployment lines

    • The short term cap gain tax is on the overall (annual) profit, and will not address speculative transaction volumes (which create market volatility) at all. Moreover, my point was limited to short-term speculative (the days/hours arbitrage) trading.

      Your doomsday scenario seems overdone:
      – I don’t understand how hedge funds will be run out of business ’cause of transaction tax, if they stay invested for a longer-term
      – The liquidity argument makes sense only if the proportion of real investors/buyers is so low in the market, that a drop in pure speculative transactions will result in unsaleable stock. I don’t have the #s, but I doubt this is the case.

      For the interested, you can see reader response to the original article here and here:

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