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.

Leave a Reply

Your email address will not be published. Required fields are marked *