Stock Tax May Cut Trading Volume 90%, Peterffy Says
By Nina Mehta and Whitney Kisling
Jan. 29 (Bloomberg) -- Taxing equity trades may reduce U.S. stock market volume by 90 percent, Interactive Brokers Group Inc. Chief Executive Officer Thomas Peterffy said.
A transaction tax was first discussed in February and revived in December, when Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio said it is the “most painless way” to fund the government’s deficit and curb speculation. French President Nicolas Sarkozy said Jan. 27 that a European debate on the subject is unavoidable.
“The mother of all creators of havoc on Wall Street is this looming transaction tax,” said Peterffy, who is also president of the brokerage and automated market-making company, in an interview yesterday. Interactive Brokers is based in Greenwich, Connecticut. “Trading volumes would plunge by about 90 percent, markets would become illiquid and tens of thousands of people would lose their jobs.”
Sending a fee to the government for every transaction would hurt asset managers, brokerages and so-called high-frequency traders, a group that accounts for 61 percent of volume, according to New York-based research firm Tabb Group LLC. Interactive Brokers handles about one-seventh of U.S. options that change hands.
9.1 Billion Shares
An average of 9.1 billion shares has traded each day on U.S. exchanges since the beginning of the year, according to data compiled by Bloomberg.
The debate follows the biggest U.S. stock market rally since the Great Depression. The Standard & Poor’s 500 Index jumped 70 percent between March 9 and Jan. 19, restoring $5.93 trillion to American equity markets. It has fallen 6.6 percent in the past two weeks as President Barack Obama proposed limiting the size of financial institutions and their proprietary trading.
The proposals from Harkin and DeFazio, both Democrats, would impose a fee on transactions of stocks and derivatives, aiming to raise money for economic stimulus plans. The U.S. government’s budget deficit in the fiscal year that ended Sept. 30 was a record $1.42 trillion.
Sarkozy joined U.K. Prime Minister Gordon Brown and German Chancellor Angela Merkel in supporting a tax on trades. In Europe, the money raised could be used to fund climate measures or aid for poor nations, Sarkozy said. He leads the world’s fifth-largest economy.
‘Wacky Idea’
“As leaders and intellectuals throughout the world endorse a tax, that makes it seem more reasonable and less like the wacky idea it is,” said Dan Mathisson, head of the Advanced Execution Services unit at Credit Suisse Group AG in New York. “And if other countries are willing to consider a tax, it becomes more realistic that it could pass in the U.S.”
New York-based NYSE Euronext and Nasdaq OMX Group Inc., owners of the largest U.S. stock exchanges, have also criticized a tax. Duncan Niederauer, head of NYSE, told the Nightly Business Report on PBS Television on Jan. 4 that it is the regulatory issue he’s “most worried about.”
“It will lead to a self-perpetuating cycle of lower volumes, higher transactions costs, lower share prices and diminished returns,” Eric Noll, executive vice president in transaction services at Nasdaq, wrote in Roll Call today. “Lower volumes and less liquidity make it more difficult to raise capital -- and a diminished ability to raise capital hurts the ability of companies to invest, grow and create jobs.”
Curbing Volume
A 1996 report on financial transactions taxes for the Canadian government found that Sweden’s 1984 levy of 1 percent on equity trades, doubled two years later, caused half of the country’s trading to move to London by 1990, a year before the tax was abolished. Capital gains revenues decreased as volume sank, “almost entirely offsetting revenues from the equity transactions tax,” the report said.
A U.K. tax on trades, in place since 1974, represents half the trading costs investors pay. It may have reduced trading volume by up to 50 percent, according to the report.
DeFazio’s proposal would put a tax of 0.25 percent on stock transactions and 0.02 percent on derivatives including futures, options, swaps and credit-default swaps. A transaction of 200 shares at $40 each would result in a $20 tax, compared with a commission of $1 for active traders at Interactive Brokers, Peterffy said.
The House bill’s sponsors have “no understanding whatsoever” about its likely effect, Peterffy said.
To contact the reporters on this story: Nina Mehta in New York at nmehta24@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.
Last Updated: January 29, 2010 16:08 EST |
