Sunday, February 22, 2009
Securities Tax Proposal
I've got quite a few e-mails asking about my take on this proposal, enough to warrant a blog post. For a someone making his living by trading the market my answer may be somewhat unexpected: I don't worry about it too much.
Here is why: I don't believe it has any realistic chance to materialize; And if it does, we will have much bigger problem on our hands than the end of active trading as our way to provide for ourselves and our families.
Let me explain. Most of my correspondents are coming from the (absolutely correct) assumption that such tax will end day trading. Imposing a prohibitve cost on the transaction, it no doubt would do just that. Notice that it's not just an additional burden, additional cost on the essential need that would help replenish government coffers as for instance gas tax would - it's prohibitive cost that renders the activity unprofitable and eliminates it altogether. There goes the idea of "let the Wall Street pay for bailout" - there won't be financial benefit to the government. Instead, there will be the destruction of the whole profession, sending more people to an unemployment lines. And I am not talking about day traders only - what about whole brokerage industry, discount brokers who suddenly lose their whole client base? More uneployed, more unhappy, less taxes collected - who could benefit from that?
Now, is the impact going to be limited to day traders and brokers that serve them? If it were so, some political expediency in search for a scapegoat could still warrant such proposal going through. After all, imposing $25K rule on day traders was no less idiotic (although less damaging), yet it did pass. In this case, however, it's about much more than just those pesky day traders. You don't really think it's just a day traders who trade every minute and every second and whose prints fill the tape with this endless flow, do you? Think of how many day traders there are and what kind of volume they could provide - and compare it with every day's volume on NASDAQ, NYSE and AMEX. What do those numerous trading desks of the banks, brokerages, all kinds of funds are doing day in day out, all day long? Who provides liquidity for longer term traders when they want in or out? Who makes the market bidding and offering on each and every stock at each and every point in time? Whom pension funds buy from and sell to when they reposition themselves? All these people, all these organisations will suddenly be put out of business by such tax. Now, imagine them all being out of the action. What happens to volume, liquidity and bid/ask spreads? Can you apply any word to the US capital market other than desert if that happens?
Let's talk about foreign investors - what are they going to do when they find themselves in the market with no lliquidity? Does the government want mass exodus of those?
Let's talk about companies listed on US markets. What are they going to do when the markets all but cease to exist? This is their financing source and pricing mechanism. Does the government want mass exodus of those?
Let's talk about the public. Does average member of the society benefit from the cost of transaction being passed to him/her when their 401K etc are being positioned and repositioned? Or from their self-directed transactions being burdened with this cost? I mean, no one seriously thinks brokerages are going to eat this cost, do they? Does the government want to load our, dwindling as it is, investments with this additional expense?
Internet and globalization era, the markets all over the world are accessible with unprecedented ease... do you impose such prohibitive measures on your market and push people into the welcoming hands of competitors?
All above leads us to one question: who would benefit from that proposal? After all, for any legislation to go through, there must be benefitting party influential enough to push it through. I fail to see any single entity within the USA that would benefit from it. We have Wall Street, Main Street, public and government as the suspects to look at. Who of them benefits from this? Not the government, not the banks and brokerages, not the public, not the companies. I just can't see it happening.
Now, as a last argument: not all things happening are being governed by the logic and that dying creature called Common Sense; sometimes raw emotions, populism, pandering to the lowest emotional reactions of the crowd takes over. That could lead to such proposal still being seriously considered and passed. Well, I still prefer to think that with no one particularly interested in the outcome, it won't - and if it will, we, as I said at the beginning, would have much bigger problem on our hands. We would have Powers That Be deliberately destroying the very fabric of the society, contributing to the job losses, capital outflow and desrtuction of the business - all for no good reason. If that happens, we better make sure we turn our houses in fortresses and have means to protect them, because in the chaos and insanity that will come, clicking Buy and Sell buttons will no longer be of any concern.