In a misplaced and wild effort to collect more revenue, Congress is discussing a transaction tax for market activity. I asked SMB Capital partner Mike Bellafiore how such a tax would affect proprietary trading firms …
Damien Hoffman: Mike, how does the the proposed transaction tax affect traders and trading firms?
Mike: The transaction tax would put a lot of small businesses out of business. There are a lot of very hard working middle-class Americans making a living running small businesses. They trade stocks, options, and other financial instruments. Clearly, increasing the cost of a round trip trade of ten thousand dollars by fifty bucks is not negligible. Margins are often quite thin in this business, so any new taxes would lead to bankruptcies.
Traders hire themselves and spend their days productively making a living for their families. I know one firm which just signed a very long lease while relying on data without this tax. Their partners are personally liable for a very expensive long term lease.
In New York City there’s a lot of office vacancies — particularly on Wall Street. Do we really want more office vacancies and layoffs in New York City and Chicago?
Damien: Is there a disconnect between the proposition of a transaction tax and the real problems which are harming our markets and economy?
Mike: Yes. Overall, this is just a punishment for short-term professional traders who had nothing to do with the securitization of questionable mortgages.
Lets go back to the late ’90s. In the late nineties, former chairman of the SEC Arthur Levitt was a champion for individual investors. At the time, spreads were larger and markets were less liquid. Levitt championed ideas like ECNs which are electronic exchanges that give individual investors more choices. He also encouraged decimalization which narrowed the spreads and made trading fairer.
If we impose a transaction tax, we would only raise trading costs back to the levels common in the ’80s and ’90s. I remember that period of time, and that wasn’t a better period for individual investors. Liquidity will certainly dry up and spreads will widen. As I said earlier, short-term traders weren’t involved in the securitization of questionable mortgages, but Congress wants us to bear the burden of this tax.
If this were to pass, there would certainly be a flow of capital out of the United States. They tried this in Sweden. They enacted a tax on all stock and bond trading. The tax drove financial business out of Sweden. So, the tax was repealed after a few years. Stock exchanges around the world are robust. The trading will go elsewhere.
Damien: How do you respond to the accusation that traders are nothing more than professional gamblers?
Mike: As somebody who has been an intraday trader for the last twelve years, I can dispel myths by proving every trade I make is based upon study. I trade consistently profitable setups for a short time period. We work very hard at developing our short term trading craft by watching video after the markets close. We keep detailed trading journals everyday. We perform visualization exercises and prepare diligently with our morning meeting before markets open. Short term traders, the ones that do well, are professional, learned, serious, consistently profitable traders. They work as hard as any other professional in another industry.
Damien: Mike, thanks for bringing some more clarity to this important debate.
Mike: My pleasure.