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This week, the European Union voted to allow 11 member states to implement a transaction tax on all equity and derivative trades occurring on their stock exchanges.

Under that plan, a 0.1% tax would be imposed on trades in stocks and bonds, while derivative transactions would be taxed at 0.01%.

The United States has considered applying a similar tax on transactions in the United States in an effort to limit the number of high frequency of computer generated "lightning" trades whereby speculators buy and sell stocks in a matter of seconds based on the inputs of computer programs. These trades now far outweigh traditional investment driven trades in pure volume and have the potential to make the market more unstable.

By instituting this tax, proponents hope that it will steer these speculative elements in the market toward a more conservative trading profile freeing up the markets for the traditional type of investments the average stock owner is familiar with and raise a substantial amount of revenue for the government in the process.

My question is, what do the critics point to as reasons for avoiding this tax? Even within the EU, 16 member states did not join the proposal, so what were their concerns?

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When you make it hard to make money by trading in locale X, you will usually find that people who were making money - and paying taxes and raising GDP - in locale X - will strongly consider moving to a different locale Y, which is now more competitive with the old location as far as offering them to be domiciled there.

So, the only practical effect of such tax would be establishment of an exchange somewhere else where people can go do algorithmic trading, and they would no longer trade in your country. Instead of some increase in revenue from the tax, you get a LOSS of revenue from diminished economic activity (and thus profits to be taxed) in your country.

You already see this in hedge fund flight from NYC to CT; or with US corporatons registering in Delaware, or with assorted financial firms going to Caymans.

In case of trading and financial industry this is even worse effects wise, since they contribute very significantly to the economy of where they are (witness NYC finances - where do you think they would be if all the traders and bankers rolled up shop and moved to The City of London?)

In addition, people who moan that somehow algorithmic trading causes problems for individual investors seem to have very little understanding of capital markets.

They are claiming to be trying to solve a problem which DOES NOT EXIST. "make the market more unstable" is a nice soundbite which plays well on TV, but how does that affect individual investors?

Long term, your stock price is a function of how much the markets anticipate your company to be able to grow its profits in the future. NOTHING ELSE.

No matter how many algorithmic trades trading companies make against each other, if you as an individual investor intend to sell AAPL at 600, you will sell it at 600 (give or take - as an individual investor, the spread won't affect your profits much, and a limit trade will protect you against major volatility).

If you want to hold it till it reaches 700, no algorithmic trading or flash crashes will have any effect on long term value of your stock.

So, the only "problem" being solved here is perception that evil greedy trading companies are making "unjust" profits (the fact that said profits are more likely than not are made at the expense of competing evil greedy trading companies and not individual investors seems to be lost on the people who proposing this without having a clue about the topic they are talking about).

Oh, and there are other people who will be harmed - people whose income/wealth (you know, those evil investors like retirees) depends on how efficiently asset managers (who also use algorithmic trading) manage their retirement funds/ETFs. You don't REALLY think that they will just eat up the tax instead of passing it onto the investors in the form of lower returns, right?

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  • This answer is so good I'm tempted to print it and hang it on the wall.
    – o0'.
    Commented Jan 27, 2013 at 11:10
  • The bottom line here is You don't REALLY think that they will just eat up the tax instead of passing it onto the investors in the form of lower returns, right? +1
    – SoylentGray
    Commented Jan 30, 2013 at 20:27
  • "You already see this in hedge fund flight from NYC to CT; or with US corporatons registering in Delaware, or with assorted financial firms going to Caymans." CT is still a quite high tax state (but with cheaper office rent than Wall Street) and Delaware incorporation doesn't have any income tax effect and is one of the most expensive places to incorporate. You don't see hedge fund relocating en masse to Nevada or Florida, for example, which don't have state income taxes. If taxes were so important, very high tax NYC would have been abandoned by Wall Street for greener pastures long ago.
    – ohwilleke ♦
    Commented Apr 12, 2018 at 15:56
  • @ohwilleke - you're under-estimating both physical and social network effects. High rollers want to live near NYC (I personally feel the opposite, but i'm an outlier in my industry or my demographics) - whether it be night life, culture, or just networking with other high rollers. CT is close enough to qualify, FL/NV are not. Also, many financial firms explicitly try to be physically close to exchanges for electronic trading that depends on how short your wires are.
    – user4012
    Commented Apr 12, 2018 at 16:06
  • @ohwilleke - Delaware is not about taxes but about regulations as far as I'm aware.
    – user4012
    Commented Apr 12, 2018 at 16:07

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