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February 22, 2010

STT Idea Once Again Beaten

By Editorial Staff

Transactions would be reduced and the quality of markets in which clearing firms process trades would be hurt by a securities transaction tax (STT). That's what several clearing executives told CQ&D about one such proposed STT recently unveiled and defeated.

"The number of clearing transactions would go down if this tax passes," warned Sean Malloy, senior vice president and co-director of global sales and marketing for Penson International.

This STT plan called for a tax of between 0.10 percent and 0.25 percent on each securities transaction. However, a spokesman for the House Financial Services Committee, Steve Adamske, told CQ&D at presstime that "the idea was a no go" and that committee chairman Barney Frank didn't back it.

What was its origin?

Rep. Stephen Lynch, D-Mass., whose office declined comment, backed the plan. The STT was also backed by labor unions and the Economic Policy Institute, a Washington, D.C. liberal think tank. A spokesman for EPI wasn't available for comment. The AFL-CIO also didn't respond to requests for comments.

"It certainly wouldn't be good for the business," said Craig Gordon, president of RBC Dain Correspondent Services.

Gordon added that clearing firms with lots of institutional business and that use high-frequency trading techniques--neither of which is the case with his mostly retail business--would be the most affected by the proposal. However, if passed, the plan would hurt the entire clearing industry, he predicted.

Similar proposals have been defeated by the securities industry. But the STT, which previously has been advocated as a method of funding the costs of regulation, would have had a different raison d'etre this time.

"A financial transaction tax," EPI president Lawrence Mishel told lawmakers in testimony in support of the tax, "seems an entirely sensible vehicle to provide the revenues we need to support federal spending and for offsetting the costs of the current jobs package."

The tax would be used, supporters also say, to pay for costs of federal government job creation and as a way of helping the government recover the costs of securities industry bailouts.

But Penson's Malloy warns that "the idea of penalizing the entire securities industry is backward. It will end up reducing the number of liquidity providers, widening spreads and hurting the individual investor."

He added that liquidity providers would inevitably go abroad in search of markets where the tax wasn't used.

EPI's Mishel said the tax would exempt credit card transactions. "Such a tax would be levied on both the buyers and sellers of all financial instruments-stocks bonds, derivatives, etc. Think of it as a small sales tax on financial transactions, somewhere between 0.1 and 0.25 percent of the value of a transaction," Mishel said.

An EPI spokeswoman said he was not available to elaborate. Paul Zubulake, a securities industry analyst with Aite Group, said such a tax would be "disastrous." It would drive some liquidity providers out of the business or send business to other places, he predicted. He said the STT was tried in Sweden and later repealed.


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