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April 15, 2009

Retooling the Plant

By Michael Scotti

Editor, Michael Scotti


Our readers produce trades. They are in the manufacturing business, creating liquidity by matching buyers and sellers.

Over the last decade, the production of trades has changed beyond recognition. The plant has been retooled out of necessity, really, as new rules and technology have pushed and pulled on each other in a continuous tug-of-war.

The SEC can take credit for most of the change with requirements to display limit orders and rules permitting new electronic venues. Congress had a hand in it, too.

It was the major driver in the push to trading in penny increments in 1997 with "The Common Cents Stock Pricing Act," and the industry finally jumped-more like was pushed-into the abyss in 2001.

Over the last eight years, the equity trading industry has adjusted to every rule and technological advance. It's still standing, despite major adjustment of business models and downsizing. In fact, the equities markets actually worked and earned high marks when other markets didn't over the last year.

We're seeing more activity from politicians in Washington again. Given the current political climate, it is reasonable for our readers to expect to see an expansion of regulatory coverage in Traders Magazine. Just look inside this issue.

In our Rules and Regs section, we write about a proposed transaction tax, an already approved increase to the Section 31 fee and a call to reinstate the uptick rule. Congress and others are also joining the fray on this one.

The story on the proposed trading tax probably won't go anywhere. The idea is to tax investors on each trade, to pay for the Wall Street bailout.

Our columnist Dan Mathisson chimes in on this, and makes a strong case against a transaction tax. Calling it a "disturbing sign," Mathisson points out how it would impact liquidity, hurt investors and chase trading to overseas markets.

Reporter James Ramage also brings a wide-angle lens to his news story on this. Interestingly, Rep. Peter DeFazio, D-Ore., the author of the tax proposal, responded to our questions within two hours. Seems he read our story online and wanted to tell his story to the trading community, too.

The irony here is that the transaction tax would chase away automated traders-the current major source of liquidity who replaced traditional market makers and specialists. It was regulation that helped to usher in their existence, and it could easily be regulation that sends them packing.

We'll keep our eyes on Washington and keep you posted.

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