Could A “Transaction Tax” Be A Good Thing?

While an FTT may indeed impact retail investors, resulting in reduced trading volume, it may also help squash the predatory effects of hedge funds and HFT’s.

“Some HFT-oriented trading firms have allegedly engaged in heavily scrutinized (and in some cases illegal) practices, publicized in Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt. These practices include frontrunning (detecting a large buy/sell order and moving in front of it in anticipation of the resulting price movement) and slow-market arbitrage (simultaneously buying and selling securities on separate exchanges to exploit small, transient price discrepancies).”

The removal of payment for order flow, and a return to a transaction fee, remains the most sensible option. But even an FTT might be worth considering if it reduces professional firms’ ability to take advantage of retail traders.

 

Free And Fair

As a fiscal conservative, I’m not too fond of taxes of any sort. I am a firm believer in “free markets.”  However, for “free markets” to work effectively, they must also be “fair markets.”

Our current capital market system may be “free,” but it is not “fair” in many ways. Regulators should take steps to ban payment for order-flow, restrict high-frequency trading, and create markets that protect retail investors from predatory practices.

Such would mean that firms providing transaction services would have to go back to charging a commission for their services. But such would potentially have the knock-off effect of “slowing things down” and providing better investors’ outcomes.

However, the reality is that since Wall Street owns regulators, those money-making schemes already in place are likely to remain.

Therefore, while not a proponent, I can make the case an FTT would raise financial transaction costs, resulting in fewer of them. How this affects the overall economy depends on whether the reduced trading is beneficial. If it is, will the reduction will be significant enough to have an impact that goes beyond the investors and traders involved.

While the emergence of zero-commission trading is generally a win for investors, there’s one potential downside — the temptation to over-trade. In other words, it could be more tempting to move in and out of stock positions more frequently because it doesn’t cost anything to do it.

Don’t make this mistake. Although there are certainly some good reasons to sell stocks, the lack of trading commissions isn’t one of them.

But what we do need are “free” and “fair” capital markets.

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