The Wall Street Journal, on November 2, 2011, containing an opinion piece by Ralph Nader suggesting that it is time for a tax on speculation. It would be terrific if all members of Congress and the Treasury read that article and did something to move that idea along. The notion that a tax on speculation is appropriate is very worthy and the only question that should be the subject of debate is the form that the tax takes.

Last year, on this web page, it was suggested that programmed high speed trading destabilized the market while contributing absolutely nothing to GNP or economic prosperity. That point is even more emphatically made by the wild gyrations of the past few days induced by the Greek debt crisis. Individual shareholder investors were not leading the charge to sell both because they generally do not have a trader mentality but, more importantly, by the time they get the news inducing the rush to sell it is too late.

High speed trading has all of the ear markings of a “casino” game and the notion that it is gambling is well founded. It is strange that there is so much debate against internet gambling while high speed trading seems to be below the radar of the legislators.

The argument that the ordinary investor would bear the brunt of any tax through retirement funds or mutual funds is a very bogus argument. It would not take a financial genius to write a tax program that avoided any burden to the ordinary investor. Retirement funds and mutual funds should not be trading. They should be earning their fees by investment analysis and investment based on that analysis. If money managers are permitted to speculate with pension fund monies, why shouldn’t individual investors be permitted to play poker on the internet with their IRA or 401 K funds? That would make as much sense and the odds in a poker game are superior to the odds of accurately calling a market swing in an individual stock. The high speed trading that is taking place is not investing. It is betting that value will change within minutes after placing a buy or sell order. The average period of stock ownership in these high speed trading models has been indicated to be minutes not days. If a tax were to be applied to any trade where the position was held for less than one week, it is suggested that ordinary investors would be spared any burden. Further, if ordinary investor (as opposed to institutional investor) direct trades (not computer generated) involved less than $100,000, they could be exempted as well. This would keep the tax where it should be – on the speculators.

Some have argued that high speed trading activity provided liquidity to the market. That too is a bogus argument. The way in which the exchanges have traditionally worked provided adequate liquidity.

What individual investor shareholders should be concerned with is an exposure to excess volatility in the market induced by high speed trading that causes rapid swings in the value of their portfolios for no apparent real purpose beyond the ability of traders to make profits.



On December 3, 2009 Peter De Fazio (D-OR) introduced H R 4191 in the House of Representatives. This legislation entitled “Let Wall Street Pay For The Restoration Of Main Street” seeks to impose a tax on all stock trades in excess of an aggregate of $100,000 in a year. On first glance, this legislation conveys the image of Wall Street paying. But, that is a giant illusion.

This proposed legislation, like so much legislation that comes out of Congress, starts out with a noble purpose but ends up hurting those it is trying to help. Think about it – all mutual funds, where many investors have at least a portion of their investments and maybe all of their pension fund investments, would be especially hard hit. Also hit would be managed fiduciary accounts where many pension funds and individual accounts are invested. A threshold of $100,000 in trades is very small and would hit small investors and not just the wealthy investment banks. Finally, the low threshold would hit estates liquidating portfolios before distribution to heirs. None of this sounds like Wall Street paying for the Restoration of Main Street. It is the individual investor paying.

If the proposed legislation were confined to a tax on trades in the trading accounts of banks, investment banks and professional traders only and clearly exempted the trades that would directly impact individual investors, then the legislation might have some merit. Everyone has noticed the recent, monumental trading profits earned by major banks and investment banks that will result in gigantic bonus payouts to employees. Yes, those trading accounts will be taxed along with the mutual funds and managed accounts but it is doubtful that anyone would pay much attention or even care if it were truly a tax impacting only banks and investment banks provided the definition of a “professional trader” was someone transacting greater than $1,000,000 in trades in a year. But, even that would have to have an exemption for estates liquidating its assets.

Let your Congressman know what you think.


There has been continuing talk about limiting executive compensation including the possibility of appointing a “pay czar”. In response the pundits are crying “chicken little, the sky is falling”. All kinds of warnings have been issued as to why the government should not be involved in legislating or limiting executive compensation. But, the bottom line is that these warnings seem to come from the people who would be most effected – the bankers and executives. The warnings are not coming from the shareholders who are the real stakeholders. The warnings are, for the most part self serving.

If the bankers, boards of directors and corporate executives had taken to heart the frustration of shareholders over overly generous executive compensation they would have taken their own action to correct the situation. But, for most of them it is still business as usual and it is this lack of action that forces the government to try to protect the shareholders against the abuses of management.

Once corporate management gets into the program and takes thair own actions, governmental action will not be needed. But, as of now, the executives are still robbing the shareholders blind with their self rewards ratified by boards who like the perks of being directors.

How much compensation is enough? Can any executive make an objective case as to why he or she is worth $20 to over $100 million in total annual compensation? Has anyone made any definitive study of what an executive does to justify that level of pay? If an executive possesed some absolutely unique skill, perhaps arguments could be made to justify pay levels. But, management skills are not unique. Graduate schools of Business turn out new, bright managers every year. Managers are not like basketball players scoring 30 points a game or golfers consistently shooting 66 in tournaments.

The notion that high pay packages are necessary to attract talent seem questionable. If someone is a commission salesperson and is a super salesman, then obviously, their pay will exceed that of other salesmen. But, corporate managers are not commissioned salespersons.

We can only hope that the Boards of Directors across America get the message that the dhareholders are angry and frustrated with high compensation levels particularly when performance has been mediocre to abysmal at best.

The Wall Street Journal of December 15, 2009 contained an artcle reporting that executives at many companies experienced increases in the value of their retirement savings plans while employees lost between 18% and 31% of the value in their 401 K plans in the recent market downturn. Further, in many companies, the value of the stock had also declined. The fact that the employees lose and the shareholders lose while the executives win is just another example of how far out of whack executive compensation plans have become. This discrepancy arises out of the availability to executives of guaranteed returns on their savings plans (in some cases 6.6% or better). The companies maintain that these guaranteed returns are necessary to attract top quality executives. But, the bottom line appears to be that these executives want the shareholders and employees to be at risk while they have no risk. Their interests are certainly not aligned with those of the shareholders or employees. In this day and age when most people eran less than 3% on their savings or T Bills how is it that executives can be guaranteed over 6% returns?

All of this suggests the need for some form of regulation to protect shareholders and company employees from the executives lining their own pockets while everyone else is facing a struggle. Perhaps the only way to curb the abuses would be to impose an income tax of 55% on all executive compensation (salary, bonus, all perks, unrestricted stock options) above $3,000,000 per year with the sole execption of restricted stock options that can not be exercised or sold for 7 years from issue or 2 years after full retirement, whichever comes sooner. In this way, the interests of the executives and shareholders might be more aligned.