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April 15, 2009

Execs Say Trading Tax Has No Legs

By James Ramage

Also in this article

  • Execs Say Trading Tax Has No Legs

A recent House of Representatives bill that many on Wall Street believe would destroy liquidity will never pass, according to industry experts.

The bill-H.R. 1068: "Let Wall Street Pay for Wall Street's Bailout Act of 2009"-is heavily flawed, lacks sufficient support on the Hill and has already failed in an earlier incarnation, they said. As written, the bill would tax each buy and sell transaction for equities, options and futures by up to 25 basis points.

"I can't believe [a transaction tax] will get any traction," Duncan Niederauer, chief executive of NYSE Euronext, told an audience last month at the Museum of American Finance. "I can't believe that would find its way to even a vote."

If it passes, the transaction tax would kill the thin-margin high-frequency trading business, which many say represents an estimated two-thirds of the daily volume in equities.

Rep. Peter DeFazio, D-Ore., introduced the bill on Feb. 13; it has nine sponsors. The bill has since been referred to the House Committee on Ways and Means, where it sits, according to the House of Representatives' Web site.

The committee has yet to address the bill because it's too soon, said John Giesea, president and chief executive of the Security Traders Association.

"By word of mouth, it's not given great chance of passage," he said. "But we've taken the conservative approach that it's so outrageous that we thought we'd speak up, and speak loudly, to ensure it's not going to get passed."

Another industry source, who declined to give his name, said the transaction tax bill lacks momentum because DeFazio sits on the wrong committees to move the bill forward. The source added that such a bill has been introduced before and rejected.

On Sept. 26, DeFazio introduced H.R. 7125: "Let Wall Street Pay for Wall Street's Illiquid Assets Act of 2008." Then, as now, the bill called for a transaction tax of 25 basis points "of the value of the instruments involved in such transaction."

The bill had 34 sponsors, and, as is the case now, was referred to the Ways and Means Committee. It went nowhere.

"It got some traction last fall with Blue Dogs and others who are concerned about the size of our debt," DeFazio told Traders Magazine in an email. "It is one idea about how to deal with the [Troubled Assets Relief Program] money that is fair and equitable and I think deserves to be a part of the conversation, so I introduced it again."

Every year, roughly 5,000 bills are introduced, while a few hundred pass, he added. DeFazio's hope this time is that the tax becomes part of the Ways and Means conversation about how to recoup the TARP funds. "I am throwing it into the mix," he said, "but I have no expectations."

David Franasiak, head of the financial services practice at the law firm of Williams & Jensen and a lobbyist for the STA in Washington, D.C., said the bill packs more rhetoric than common sense. Still, he added, the bill's impact would prove too devastating not to take considerable preventive measures now.