I’ve mentioned transaction taxes briefly in a previous post and it incited a lot more comment than I’d anticipated. This morning there’s an op-ed in the Wall Street Journal on transaction taxes and, as might have been expected, the authors are against them:
A tax on financial transactions would have to be imposed internationally to prevent any particular national market from being disadvantaged. It would be very difficult to achieve universal international consensus regarding the details of such a tax. In our environment of global capital markets, it would be virtually impossible to enforce it reliably.
The U.S. has the broadest, deepest, most liquid and efficient capital markets in the world. This is why it can continue as the world’s premier reserve currency nation despite consistent trade deficits. People are attracted to the our financial markets because of their high liquidity and low transactions costs. Efficient capital markets also benefit all individual investors who save and invest through 401(k)s, IRAs and other retirement programs. The transactions tax would gravely wound financial markets. It is hard to imagine a piece of legislation that would have more damaging unintended consequences.
That’s essentially the argument that was made here and I don’t have a problem with it. However, I thought that this portion:
Some argue that high-frequency traders, who reportedly execute 70% of the equity market trades, would pick up the lion’s share of the bill. But high-frequency traders are not villains—indeed, they play an important role in improving market efficiency.
Often mischaracterized as speculators, high-frequency traders scour markets for minor mispricings and arbitrage trading opportunities. They buy and sell stocks in an instant, hoping to earn pennies on a trade. Far from destabilizing or creating volatility in the market, their actions significantly increase trading volume, reduce spreads, promote price-discovery, and ultimately reduce transactions costs for long-term investors. Such trades might not be doing God’s work, but they are socially useful.
was a lot weaker. I question the social utility of taking advantage of arbitrage trading opportunities that exist for a microsecond compared to those that exist, say, for an hour.
As I said in the comments of the post in question, I don’t have particularly strong feelings about this one way or another. There is one thing I’d like to point out. Publicly traded companies are wholly creatures of the state and, consequently, are rightfully subject to the whims of the state. If you take the king’s penny you are the king’s man.
I also think that the authors ignore the effects of computerized trading using identical strategies in pushing peaks higher and valleys lower than they might otherwise have been. But that’s a subject for another post.