Monday, 20 February 2017
Last updated 2 days ago
Feb 24 2009 | 7:11am ET
By John Giesea, President and CEO, STA -- The Security Traders Association (STA), the leading advocacy and education organization for professional equity traders in the U.S., is stating its strong opposition to a bill introduced by Congressman Peter DeFazio, H.R. 1068 the “Let Wall Street Pay for Wall Street’s Bailout Act of 2009.” The bill aims to impose a 0.25% transaction tax on the "sale and purchase of financial instruments such as stock, options, and futures." The proceeds of this tax are to pay for the “net cost” TARP and emergency Federal Reserve programs.
In an open letter, the STA registered both its strong opposition and the rationale for its position. The STA demonstrates that bill is based on erroneous premises and misstatements of fact and could lead to serious disruptions in the capital markets at a time of national crisis.
A synopsis of the STA’s position follows:
The bill is based upon a claim that the $700 billion TARP is intended to “protect Wall Street Investors; therefore, the same Wall Street investors should pay for this infusion of taxpayer money.” In fact, Wall Street investors have lost an additional 30.2 % of their investments since the passage of the TARP on Oct. 3, 2008, as measured by the S&P 500 index. Infusions of money under the TARP have been accompanied by the government’s protection of taxpayers in the form of its receiving warrants and preferred stock, as well as imposing restrictions on compensation and mandating corporate and operational changes at the institutions. The TARP has been used by the Treasury Department to stabilize the banking system and prevent an unprecedented economic meltdown. The monies approved and spent under the “TARP” authority has not been used to protect investors or Wall Street, but instead to protect Main Street and the financial system.
The premise of the above flawed “findings” is even more troublesome. Suggesting that Wall Street Investors caused the turmoil facing the economy and the markets shows a blatant disregard for the facts. Responsibility for the current situation can be assigned to many different players in the economy: consumers taking out a mortgage they could not afford, mortgage broker industry practices that resulted in loans being made without adequate verification of income and financial condition; the mortgage lenders who were forced to compete with government subsidized competitors; the existence of an unregulated secondary markets for mortgage backed securities that allowed lenders to shift the risks of originating loans, knowing they could be removed from their balance sheets through securitization; credit rating agencies that failed to adequately assess and report the risks of default of securitized products; and the national policies of promoting home ownership, which while laudable, did not take into account the ramifications of promoting home ownership to people who might not have the financial resources to afford it.
The incidence of the tax fall squarely on the very victims of the financial crisis who have seen the value of their investments decrease by 40-50% over the last year, that is, individual taxpayers, savers, small businesses, endowments and those relying on retirement plans. This legislation purposely hits these victims of the meltdown one more time, asking them to pay for a financial bailout of a market meltdown that they did not cause.
It is a tax on capital formation and especially targets the final frontier of liquidity in the financial markets marketplace, the stock, options and futures markets. These markets have been remarkably resilient and liquid in a time of extreme stress and illiquidity. These exchange markets should not be taxed, but should be applauded for being able to function in the manner for which they were designed in such tumultuous times. This ill advised tax will be aimed at these important national market centers and will hurt their ability to remain highly liquid. In short it may worsen the financial crisis.
Will Hurt the United States at a Time of Extreme Financial Stress:
The rate the bill would impose—0.25% is very large and meaningful—and will most certainly drive stock, options and futures trades offshore to foreign venues. For example, a $10,000 trade (or approximately 100 shares of stock in Apple, Inc.) would increase the cost of a round trip transaction by $50, which is a very large amount in a trading environment where fractions of a cent profit are the norm. Likewise, a Eurodollar contract is based on a notional $1,000,000 and 0.25% of that amount is $2,500. By way of reference, an exchange may charge about $0.08. These very large tax burdens will result in less trading activity, less saving and investment, and most certainly less business in the United States, thereby damaging the United States' position as a world financial center at the very time that the U.S. is experiencing extreme market distress.
The Bill will Impair Liquidity and Price Discovery
By adding to the execution costs of an individual trade, the transaction tax would greatly increase the cost of doing business for the essential liquidity providers on U.S. futures exchanges. These market makers, whose constant participation and rapid turn-over is the major source of market liquidity, operate on razor thin margins. Many of these market makers are at the margin of profitability. This tax will expose them to the choice of continuing on the exchanges at a profit level unjustified by the risks assumed, or taking their business elsewhere, or simply to close their doors.
The exit of liquidity providers means decreased efficiency of the markets, wider bid ask spreads, more volatility and less facility for other market participants to make effective use of markets. Moreover, stock, options and futures markets provide significant benefits to market users and to persons seeking meaningful information, including pricing, in order to guide their decision making on investment, crop planting, herd management, etc. The deeper and more liquid the market, the better the price discovery and related information provided. Impairment of liquidity lessens the value of the information and the functioning of a market based economy.
John Giesea is president and CEO of the Security Traders Association, a worldwide professional trade organization that works to improve the ethics, business standards and working environment for its members.