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January 21, 2010

Trading Tax Proposal in Congress Rankles Street

By Gregory Bresiger and Peter Chapman

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  • Trading Tax Proposal in Congress Rankles Street

A bill introduced by Rep. Peter DeFazio, D-Ore., to tax trades on stocks and derivatives has trading executives uneasy, but in fighting mode.

"I'm not pleased with the progress of this bill in Congress," Bob Greifeld, chief executive at Nasdaq OMX, said at a recent meeting with investors, sponsored by Goldman Sachs.

Rep. Peter DeFazio, D-Ore.

John Giesea, president of the Security Traders Association, told STA members that any tax would increase costs for market makers. They "operate on razor-thin margins," Giesea said in a letter to STA members, predicting that some dealers might close their doors if the tax went into effect. That would "decrease the efficiency of the markets, result in wider bid-ask spreads and increase volatility," Giesea said.

H.R. 4191 is currently in committee, and its prospects for passage are unclear. It is at least the third version of the bill sponsored by DeFazio in the past year or so.

DeFazio believes the government should tax Wall Street and then use the proceeds to stimulate economic growth. The issue is payback, according to DeFazio. "The American taxpayers bailed out Wall Street during the crisis brought on by its reckless speculation," the legislator said in a written statement.

Pension funds and mutual funds would be exempt from the 0.25 percent tax on trades. The bill would also exempt from the tax the first $100,000 of transactions. The measure is aimed, in part, at "high-frequency traders," sponsors and other supporters claim. H.R. 4191 would "slow the rampant speculation that has created such havoc in our financial markets," said John Bogle, the founder of the Vanguard Group of Funds. The bill has the support of the Speaker of the House, Nancy Pelosi, D-Calif. She said it has "a great deal of merit." She also said the U.S. might convince its foreign trading partners to make the tax a global tax.

Sen. Tom Harkin, D-Iowa, says he is introducing a companion bill in the Senate. "There is no question that Wall Street can easily bear this tax," the senator said in a statement. The securities industry disagrees. Industry observers say the tax plan would hurt the individual investor over the long run. "This legislation is ludicrous," said Rich Repetto, a securities industry analyst with Sandler O'Neill and Partners. "No matter what sort of waivers they put in, there is a large risk that costs will be passed on to the end user." Another industry observer said the plan would have unintended consequences.