In the attempt to rein in high-frequency trading Democrats in the US House of Representatives and Senate have filed identical bills to establish a transaction tax across a broad range of listed and over-the-counter products that likely will result in throwing out the baby with the bath water.
Sponsors of House Bill 1516 and Senate Bill 647, each entitled The Wall Street Tax Act, seek to enact a 0.1% tax on transactions on trades and margin payments involving “any share of stock in a corporation, any partnership or beneficial ownership interest in a partnership or trust, derivative as well as any note, bond, debenture, or other evidence of indebtedness.”
The authors of the bill only provide exceptions for notes, bonds, debentures, or evidence of indebtedness “that are subject to the rules of, a qualified board or exchange located in the United States, and has a fixed maturity of not more than 100 days.”
Alastair Hawker, QB
“When you delve into the wording of the proposal, it states that the tax is 0.1% of all margin payments paid by the buyer of a derivatives contract,” Alastair Hawker, global head of sales at Quantitative Brokers, told Markets Media. “That is very specific, and also has wide-ranging consequences for different market participants.”
In a recent blog post on the brokerage’s website, Hawker wrote that although the authors of the legislation intended to curb the excesses of high-frequency trading, the financial transaction tax would affect buy-and-hold investors disproportionately.
Using “back of the envelope” calculations, he estimated that an investor who held a 10-Year Treasury Note Future with a notional value of $120,005 and an initial margin of $1,200 for one day without a price change would pay $1.20 for the proposed tax.
If the investor held the same contract and rolled it twice, the initial margin jumps to $3,600 and would pay $111,270 in variation margin payments as well as $115 in financial transaction tax.
“Market makers will not bear the costs,” said Hawker. “They are already on thin margins, so bid-offer spreads will widen. When spreads widen, volatility tends to go up, and it becomes much harder and more expensive to trade.”
He also cited that Sweden experimented with a financial transaction tax on equities, equity options, and fixed income securities in the mid-80s, before lowering and eventually abolishing the tax in 1991.
Although there is a slim chance for the bills to become law in the 116th Congress due to the Democrats holding the House and Republicans controlling the Senate and the White House, the 2020 presidential election is just around the corner, according to Hawker.
“I cannot see anything but a bad situation coming out of a tax like this,” he said. “This is not like a sales tax that you do not like but simply pay it, and it doesn’t change your behavior. This fundamentally will change people’s behaviors, which is their intention. What they probably do not realize is that it ultimately will impact investors like beneficiaries of pension funds through much higher trading costs.”
