A Tax That May Change the Trading Game
' To the dismay of the United States government — not to mention Wall Street — much of Europe seems poised to begin taxing financial trading as soon as next year.
[...] If Europe proves to be correct, it could turn out to be a seminal moment in the relation of governments to large financial institutions. The tax would be tiny for investors who buy and hold, but could prove to be significant for traders who place millions of orders a day.
[...] I’ll get to how Europe thinks it can prevent widespread evasion in a minute. But for now, assume the Europeans could accomplish that. And assume, as European officials say they hope will happen, that the tax spreads to other major markets, something Europe is trying to encourage by offering to share the tax revenue with other countries that impose a similar tax. What would happen?
It would not destroy markets that have good reason to exist — that is, markets that serve actual investors. The tax would be far smaller than the fixed commissions that American investors once took for granted, and even less than the costs implicit in the fact that until decimalization arrived in 2001, that most stocks could move only in increments of one-eighth of a dollar, or 12.5 cents. Markets, and the American economy, managed to prosper.
But there would nevertheless be significant changes — changes that might be for the better in some ways. High-frequency trading, which was encouraged by allowing prices to move in increments of a penny or less, and by technological advances, would be discouraged. So too would be some of the strategies used by hedge funds that involve trades expected to yield very narrow — but presumably very safe — profits. To make such trades worth doing, funds borrow a lot of money and make the trades using very little equity. That is a strategy that is guaranteed to work — or to blow up disastrously if markets do not act as expected. Discouraging it might be a good thing.
One objective, says Algirdas Semeta, the European Union commissioner in charge of tax policy, “is to reorient the financial system back to financing the real economy.” '
nytimes.com
Jim |
