You Down with FTT? (yeah, you know me…)

December 6th, 2012 at 10:38 pm

I was on a panel the other day exploring the idea of a financial transaction tax, or an FTT (here’s the video).  Much of the discussion focused on the attributes of the idea, riffing off of the bill by Sen Harkin and Rep DeFazio for a small FTT on stock, bond, and derivative trades.

Whaddya mean, small?  I mean 0.03%, or three basis points—three one hundredths of a percent, or thirty cents on a $1,000 trade.  Small, right?  Except for according to the JCT score of the bill, which includes behavioral responses, like diminished trading, it raises $350 billion over ten years, which ain’t exactly nothing.

Here are some of the points I made, but be sure to listen to the other panelists, all of whom were really interesting (I mean it—check them out—they each brought something unique to the table).

–Not only does the FTT exist in many countries—the London exchange has long had one, though its base is limited—but France recently added one and Germany has recently shown strong interest.  The more places that have the tax, the less compelling is a central argument of opponents: trades will just go offshore to avoid the tax.

–The tax is likely to reduce trade volatility–some say that’s a good thing but others disagree.  I give both sides of the argument in the video (pro: volatility is the enemy of patient capital and productive allocation; con: anything that diminishes trade volumes blunts liquidity, transparency, and price discovery…but listen to Wallace Turbeville on this point).

–The incidence (who bears the burden of the tax) is not well known…as I say, my intuition is it hits high frequency traders (kinda obvious, I know), but there are other options, including consumers of financial services if traders and the exchanges can push the tax forward to them.

–So, potential upsides of the FTT: reduce volatility, improve capital’s patience and productive allocation, perhaps reduce the distorted size of the financial sector (i.e., correct negative externalities), significant revenues.

–Potential downsides: chased trades offshore; some argue is the real problem in contemporary financial markets is leverage, which relative to equities, already has favorable tax treatment.  The FTT doesn’t scratch this itch, and even exacerbates it (by amplifying the tax advantage on debt financing).

One other point—Wallace Turbeville, a former Goldman VP who’s now a senior fellow at Demos (!)—says something to this effect in his presentation: back around WWII, the average holding period for a stock was four years; in 2000, it was 8 months; in 2008, 2 months; and in 2011, it was 22 seconds.  I’m not sure that’s quite right, but he’s definitely on target re the trend.

And as he stresses, it’s hard to believe there’s useful information or productive allocation in much of the high-frequency trading that’s going on today.  In fact, it’s a lot easier to believe that there are significant negative externalities engendered by that stuff, and if so, the FTT is one way to internalize them.

Source: Business Insider

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14 comments in reply to "You Down with FTT? (yeah, you know me…)"

  1. Alex Ajeto says:

    Only you would reference Naughty by Nature in a blog post on financial transaction taxes Jared. You are my idol. Please continue to be awesome…


  2. Oddmund Grøtte says:

    I don’t get this. Why would a FTT reduce volatility? This goes against all my experience with trading stocks for 15 years. This argument has been repeated so many times and now it has established itself as “truth”. There is absolutely no logic it will, contrary it will increase volatility.

    So the moral is: if you don’t like it (high frequency), tax it. There are so many unintended consequences with this tax.

    I’m very fearful of this tax. It will diminish my pension in 30 years time with at least 10% per year.


  3. Fred Donaldson says:

    Recall many years ago paying $200+ for a broker to buy me just ten shares of a stock. Today, same transaction is a few bucks. The FTT will hit the masters of the universe, who trade the same stock a thousand times in a minute, and that is the target of the tax, not my transaction or two a day.

    Can anyone explain which Adam Smith law of free market that justifies a thousand trades a minute?


  4. Mike Kuhn says:

    FTT discussion does not address many fundamental economic issues. First what is being taxed is flow of capital irrespective of gain or loss and free flow of capital was the basis of the success of Western economies so far. It is double taxation because income and capital gains are already taxed. It would discourage risk taking and the velocity of capital flows which are basis of accelerated economic growth for centuries. FTT will distort market place because exemptions and loopholes will be granted for market making and for big banks resulting in overcharging small investor and restricting their access to marketplace. There is nobody who would know with certainty what speed or what holding period is good for the stock market. Most importantly it would transfer billions of dollars of Capital from free economy into hands of incompetent and corrupt bureaucrats as Budget. These points are conveniently missing from discussion on FTT that focuses on naïve assumption that transfer of capital property is the same as buying groceries and everybody knows that groceries are for most parts taxed and they conclude that financial transactions are not. This is not true. They are already taxed.


    • Nicholas Agriesti says:

      You make a fine point, sir; but can you explain how these consequences have manifested themselves in the European which levy such a tax? That would be part of the deciding factor, don’t you think?


      • Mike Kuhn says:

        Great Britain has stamp tax that is of limited scope and is paid by few market participants. Sweden abandoned that tax long time ago and is strong opponent of such tax. France just introduced it and encounters immediate issues with tax avoidance. These experiences do not correlate well with long term economic impact of such tax. However, European (continent) capital markets are virtually nonexistend as compared to the rest of the global markets (few percentage points of total capital). European countries are really socialist economies with government budget driving most of the economy. Their economy has monopolistic structure and many industries are virtually nationalized. This economic burden already created economic stagnation. If they sequester more Capital and turn it into Budget with this tax the effects can only be exagerrated. So there it is. If you look closely the effects of such tax are already there even without having it implemented yet. Just by studying Eropean case carefully we can avoid this economic trap.


  5. Christopher C. says:

    Instead of a per transaction tax, what about a capital gains tax that starts very high (95%) and slides down the longer the security is held until is reaches the current base capital gains rate?

    Time Held – Tax %
    < 1 minute – 95%
    < 10 minutes – 90%
    < 1 hour – 85%

    = 1 year – base rate (15%)

    It would encourage longer term investing, but if someone can make a killing in short time, go for it!


    • Auros says:

      I like that idea in theory, but in practice, the brokerages are having a hard time complying with the current version of long- vs short-term gain/loss tracking. I keep my own records of my share lots, and always double-check the cost basis calculations that are showing up on my broker’s website after a trade executes, to make sure that when the broker sends the 1099 forms the next year, they’ll have it right.

      To do what you’re talking about, we might well have to mandate a centralized record of all trades, with full traceability — so when a trade was executed, you’d know who both the seller and buyer were, and when each lot of shares was purchased. (Basically, for shares issued subsequent to instituting such a system, in theory you’d be able to trace a specific share through its history, all the way back to the IPO.) Of course, that might not be a bad idea, for other reasons. The system we have now, where a bunch of separate exchanges that are not at all transparent to an average market participant are authorized to trade stocks listed on major exchanges like NYSE, and you end up with algorithms trying to get ahead of each other to take advantage of fraction-of-a-penny differences in price between exchanges, is kind of ridiculous. Slow the system down — execute trades atomically in a block at the same price using a reverse auction that runs every, say, ten seconds. That’s slow enough for the trading computers to all sync up, worldwide, and after the HFT algobots die for lack of anything to do, you’ll have plenty of processor time to run a cycle of “commit last round’s trade records to database, solicit new bids, calculate price, send out results to traders.” (Felix Salmon has talked up an idea like this in the past.)


    • Mike Kuhn says:

      Could you tell me who knows what holding period differenciates between “good” and “bad” investor or trader. Please remember that the basic principle of efficient and free markets is unrestricted access to the market. Nobody should be asked how often they trade and why they trade. It is extremely important to understand this simple but very important concept. Throughout times people always complained about new technologies and somehow we made great progress from face to face trading, then telegraphs, telephones and now computers, I do not know what the future holds for trading but I woul be not willing to try to stop others from making progress because I benefit from this. My transaction cost as individual investor is insignificant now and access to markets is free and unrestricted. Before it cost me a lot to place a trade and execution was dependent on my broker lunch hours. I do not want to go back to that.


  6. Jill SH says:

    The caterer guy (David Borris?) essentially makes my point from the other day about why we need the FTT, maybe using it to offset the corporate tax rate.

    It’s the difference between the years of investing in, building up, and working night and day putting sweat equity into a Main Street business, which is vulnerable to an economic slowdown, and the 22 seconds for a stock transaction.

    Businesses that do real work and provide real services are not the same as the money players.

    Do the FTT. Drop the corporate rate. (But do end subsidies to profitable companies.)


    • Mike Kuhn says:

      You do not realize that without this 22 second stock transactions which means how fast capital can be reallocated we would still be in 19th century. Most people who discuss this tax use kitchen table logic. Nobody understands the concept of Capital and Capital Markets in depth yet they are taking very ideologically driven position. Many of the advances of modern financial markets even including derivatives and securitization of mortgages are not that bad and should be harnessed now more than ever to recover from this crisis. Same applies to efficient capital markets. What really is needed is more transparency and more competition and equalizatin of opportunities in the marketplace and not attempts to destroy it. It served us well despite the pain. The US was for a long time at the forefront of economic progress. Lets keep it that way.


  7. David Martin says:

    The sole, single and only reason why an FTT is being discussed anywhere in the world is to feed the insatiable appetite of politicians for more revenue.

    Any discussion of an FTT in regards to HFT, reducing volatility, etc. etc., is a complete smoke screen.

    Creating a new source of funding for failed government is all there is to it. Don’t be fooled by anything or anyone else.


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