Industry Fears Proposal in Congress Would Destroy High-Frequency Trading and Liquidity
Traders Magazine Online News, February 25, 2009
Trading industry experts said the passage of a new bill to tax each buy and sell transaction by up to 25 basis points would devastate liquidity in the equities market.
The proposed House of Representatives' bill-H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009-would, they say, dramatically increase trading costs, widen bid-ask spreads, kill off high-frequency market making firms, slash volumes and move trading to overseas markets.
"It would have a really major impact for the high-frequency players," said Jeff Bell, with Wedbush Morgan Securities' clearing and technology group. "It would end that whole business."
Since equities began trading in penny increments in 2001, the trading industry has undergone a massive overhaul, moving to an electronic trading world. Today, roughly 65 percent of all volume is executed by high-frequency traders, who have replaced specialists and market makers who fled the inside market due to narrower bid-ask spreads that raised their risk profile.
The concern within the trading industry is that if high-frequency traders were taxed, they would exit the business, because their current razor-thin margins would turn to losses. The result? Liquidity would disappear for all market participants.
Wedbush clears the trades for many of the industry's largest high-frequency firms. Bell calculated, for example, that Wedbush's fee for the tax would have been more than an estimated $50 million on Monday alone for having done more than $20 billion worth of securities transactions that day.
"That's a huge tax; 25 basis points is enormous," said Dan Mathisson, the head of Credit Suisse's Advanced Execution Services.
The proposed bill would add 5 cents per share to the cost of trading an average stock, at around $20 a share, Mathisson added. By comparison, electronic trading commissions for services cost a penny-or just under a penny.
"You're talking about raising the trading costs more than five times," he said. "That would bring liquidity presumably down to levels from 10 years ago, which is the last time transaction costs were that high. I assume you would see volumes drop from about 10 billion shares a day to one billion shares a day."
Details for the bill have yet to be worked out. As written, the bill would amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions enough to recoup the net cost of the Troubled Asset Relief Program. Rep. Peter DeFazio, D-Ore., authored the bill.
DeFazio introduced the bill on Feb. 13. It has since been referred to the House Committee on Ways and Means, according to the House of Representatives' Web site.
The bill's findings argue that because the $700 billion TARP fund and the new Federal Reserve lending facilities were created to protect Wall Street investors, the same Wall Street investors should pay for the infusion of taxpayer money.
"The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor," the bill states. "This transfer tax would be on the sale and purchase of financial instruments such as stock, options and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year."
The offices of Representatives DeFazio and Michael Capuano, D-Mass.-the only one of seven additional sponsors of the bill who is on the House's Financial Services Committee-did not return calls for comment.
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