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Posts Tagged ‘transaction tax’

The Echo of John Maynard Keynes

Posted by Larry Doyle on November 30th, 2009 1:14 PM |

British economist John Maynard Keynes

British economist John Maynard Keynes

When in doubt, increase taxes.

Further taxing of the financial industry seems like an appropriate policy given the bailouts provided over the last few years. Screw Wall Street, right? Yeah, hit them harder!! They deserve it. While I understand and appreciate the current rage directed at the financial industry, increasing taxes strikes me as an overly simplistic answer to a complex problem.

Increasing taxes on the financial industry is not a new idea. In fact, the noted economist John Maynard Keynes promoted this idea back in the 1930s. It was neither put into practice then nor again when resurrected in the 1970s. Will it be implemented currently? Bloomberg addresses this topic in writing, Taxing Wall Street Today Wins Support for Keynes Idea:

John Maynard Keynes proposed a tax on financial transactions in the middle of the Great Depression, and another economist, James Tobin, revived the idea in the 1970s as a way to counter currency market speculation. Neither effort gained much acceptance. Now, a growing number of economists and politicians argue that it’s time for a levy on trading stocks, bonds, currencies and derivatives.

U.K. Prime Minister Gordon Brown said on Nov. 7 that a transaction tax might compensate for the billions of dollars that the public has spent on bank bailouts. Government officials in France, Germany and Austria have voiced their backing. U.S. Treasury Secretary Timothy Geithner answered Brown a day later, saying the tax was not something the U.S. would support. House Speaker Nancy Pelosi, on the other hand, says the idea has “substantial currency” among congressional Democrats.

While on the surface increasing taxes on Wall Street seems reasonable, its success presumes that nothing would change in how Wall Street transacts business. We should not be so naive. (more…)

High Frequency Trading: Point-Counterpoint

Posted by Larry Doyle on July 17th, 2009 6:12 PM |

High frequency trading activity has become a very hot topic both on and off Wall Street. My trading instincts tell me that this activity is not productive for the long term health and well being of the market. I have referenced the work of Joe Saluzzi and his colleagues at Themis Trading in making the case for the prosecution.

In an attempt to present a case for the defense, I searched and found commentary written by Sang Lee, managing partner at Aite Group. Lee recently wrote for Advanced Trading, In Defense of the High Frequency Trading Community:

Various potential regulations, including the reinstatement of the uptick rule and transaction tax directly threaten the business model of the high frequency trading community.

Sense on Cents counterpoint: The uptick rule required short sellers of stock to only transact at a price higher than the previous trade. Our friendly Investing Primer, Investopedia, informs us:

This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.

The rule worked fabulously for almost 70 years before being discontinued in July 2007. It was discontinued in an attempt to promote trading volume on the exchanges and in turn increased fees.

Sang Lee writes further in making his point:

In recent years, growth of alternative electronic trading venues has been driven by a multitude of factors: the introduction of decimalization; the adoption of FIX as the main protocol for electronic communication; the availability of technology for developing market infrastructure conducive for electronic trading; the rapid adoption of electronic trading; the adoption of algorithmic trading; and the availability of co-location services.

Sense on Cents counterpoint: Fairly obvious with all of the technological advancements that we are not looking at your grandfather’s “buying 100 shares of IBM.” Modern day trading activity is both fast paced and high energy. Little wonder why it has become so much more driven by technical analysis than fundamental valuations. (more…)

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