Today was a brutal day on Wall Street. Through no fault of investors.
Today was brutal because of traders and financial engineers who trade on every piece of data . Those that work from quantitative formulas that drive trades based on data input. Not a single one of them acts like a shareholder. And that is the reality of the stock market.
The market is no longer driven by shareholders. The market is driven by formulas that drive trades.
So what should the government do ?
Tax every single share of stock that is bought and sold 25 cents per transaction. One quarter. If you buy a share of stock, your brokerage pays a 25c tax. If you sell a share, your brokerage pays a 25c tax. 1 share, 100 million shares. Its 25 cents per share.
Of course the tax will be paid for by those of us who are buying and selling stocks. So what? Here is the reality. If you are a true investor. Someone who wants to own a share of stock in a company you believe in, then its an amount that is not going to impact your investment decision making process. You bought those shares to be a shareholder.
If you dont think the company you are buying is worth at least a quarter more than what you are paying , why are you buying shares ?
If you are a professional trader or an institutional trader that trades continuously, the same type of traders that created the mess in the market today, then it may impact your decision making process, but only to the point of reducing your returns by a minimal amount. Its not going to change your inclination to trade. As everyone on Wall Street will tell you “Traders Trade”. You may trade less and make less in aggregate, but no one but you cares about that. You will find your way to make money. There is always the loop hole and inefficiency. Thats what you live for. But you won’t stop trading.
If you are a day trader, you are going to have to be right more often or actually hold on to stocks for a longer period of time. That’s ok. I know it will be rough on some of you that make a living this way. But in reality, you don’t add anything to the markets.
Whats the bigger economic impact of having the tax ?
If the NYSE, Nasdaq, Amex and OTC are trading 2 Billion shares a day or more , like today, thats $ 500 Million Dollars PER DAY. If there are 260 trading days a year. Thats about 130 Billion dollars a year. If volumes drop because of the tax. It is still 10s of Billions of dollars per year.
Thats real money for the US Treasury. Thats also an annual payment towards the next time Wall Street screws up and we have a black swan event that no one planned on.
Of course there has to be some fine print. You could reduce the tax per share for stocks under $5 dollars to 5cents. But i would leave it at 5cents even for stocks priced at pennies per share or less. This tax would act as a protection for investors and traders who get pitched unregulated penny stocks and who are more often than not the victims of rip off artists. It would minimize the pink sheet companies that trade billions of shares of stocks priced for pennies. Those companies that are legit, could do a reverse split to protect their investors. The others can go away. They probably shouldn’t be public anyway.
The stock market today is dominated by financial engineers and traders. Institutions who look for the loopholes and exploit them. Thats not a bad thing. There will always be loopholes, and they will always find them. But at least with the tax, when they do, we are protecting ourselves a little bit. Heck, the Treasury could join in the show and buy long and short 20pct out of the money derivatives on the market to protect us even more. This way if things go haywire like they did a couple years ago and have the past few days, the Treasury will be playing with Wall Streets’ money. I’m sure Main Street won’t mind terribly if the Treasury plays with the house’s money.
Particularly since the only given for Wall Street is that every 5 years or so there will be an extreme event. Why ? Remember the rule of Wall Street …
First there are the innovators. Then there are the imitators. Then there are the idiots. And there are tons and tons of idiots. Just look at the billions upon billions squandered in closed Hedge Funds. The idiots always find there way back into the market and the market always wipes them out taking investors down with them.
It’s time to make all those playing this game pay a tax per transaction.
And one more thing. When Wall Street talks about how a tax will hurt liquidity, ask them why, if liquidity is so essential to a market, they don’t want any transparency and aren’t trying to increase liquidity for the derivatives they sell on a custom basis ? Or why they are not trying to increase the liquidity for the corporate bond markets where bonds trade with a huge spread ?
They want minimal transparencies where the spreads are high and they can keep them that way and price their products anyway they like. Where the spreads are already low, they cry wolf about the liquidity they need to do business. Let me explain the reality of liquidity in today’s world. It won’t increase the amount of capital available to businesses. The companies that plant servers next to stock exchanges to make a few cents per trade aren’t buying IPOs, secondary offerings, or holding shares in support of valuations in a company they believe in. Every time markets crater, there is never a lack of liquidity. THere are still a billion or more shares traded. There is plenty of liquidity.
So tax the hell out of Wall Street , give it to main street. Make it tougher for the financial engineers and you will make it easier for investors to evaluate companies and hold on to shares and maybe even act like owners of those companies.
Taxing the Hell Out of Wall Street could actually increase the trust investors have in Wall Street. And it might just protect us when the next meltdown happens. And it will happen
The idiots will see to it.
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Hi. For an Australian perspective
http://thecuriousmail.wordpress.com/2010/01/03/conversation-overheard-in-a-wall-street-building/
Cheers
Comment by thecuriousmail -
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Fight the Derivatives Cancer with a Wall Street Sales Tax, Plus Bans on Hedge Funds, Credit Default Swaps, and Synthetic CDOs http://j.mp/cHLhtK
Comment by MediaEngineer -
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Two words: Berkshire Hathaway
Tax policies do two things: Taxes (1) raise revenue and (2) alter behavior to greater or lesser degrees.
In the short term, your proposal may raise 100 Billion in revenue until businesses, investors, Wall Street etc adapt and adjust. You pointed out several adjustments already: reverse splits, going private, disappearing. Some companies would issue debt instead of stock. Some would develop instruments that *act* like a stock but are not legally a stock. Tax avoidance would reduce the revenues from this new policy.
As far as altering behavior, consider this tax. One dollar tax per point scored in an NBA regular season game. Higher taxes on playoff games. Presumably, since a win is very valuable, this tax would not alter behavior in most circumstances. If the Mavs are up by 20 and snag a defensive rebound with 30 seconds left (not enough time on the shot clock), they may put up a wild shot to hit the backboard as the shot clock winds down. Most likely, both teams know the outcome. But overall the tax does not change behavior.
Raise the basket tax to $1,000 per point (or higher) and maybe teams play tighter defenses. Behaviors change.
Would the per share tax alter investors behavior? Probably. How much? Hard to tell.
The bigger question is would it stop or deter the rogue *gamblers* on Wall Street from inventing another scheme? Doubtful. You are very correct that the innovators et al will find loopholes. Credit Default Swaps act like insurance policies but are not regulated by any state’s Insurance Commissioner.
Would a per transaction tax really change behavior to stop excessively risky behavior? I really doubt it. Risk is a hard thing to quantify ahead of the fact.
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Sorry Mr. Cuban, you know a lot about a lot of things but taxing Wall St will accomplish nothing. In fact, it will make it worse. the liquidity will be drained from the bid/ask spread.
To bring parity to the NBA, should we tax some teams?
To achieve the goals that you elucidate, you need to change the structure of Wall Street. Taxes will accomplish nothing.
Read more about it at http://www.pointsandfigures.com
Comment by pittrader1988 -
There’s already a transaction tax. It’s the difference between the high and low price. When you buy a block of shares, it’s not the ticker price that’s listed on the news. That price is the average between the buy price and the sell price. So for instance, if you buy 100 shares at $10 a share. If you were to sell instantly at that point, the sell price would be something like $9.80 / share. That 20 cent difference goes into paying all the brokers and overhead in the stock market.
I do agree tho, the volatility in the market is driven too much by day trading and not investors. Take Apple for example, great company, yet last year they plummeted from 200/share down to 83, and now they’re back up to 235. Maybe they should just get rid of shorting, ie. having someone else sell your shares promising to pay them back. Then, if investors really feel like a company is a bad investment, they take it out rather than banking on bad news to make them quick cash.
Comment by Gary -
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General principles of reform:
1. Transaction tax, if implemented, should be progressive and go into general revenue to help pay down the debt, not create future bailout funding.
2. Micro-transactions and other bad Wall Street trading practices should be curtailed by regulation by the SEC, and not new taxes, which won’t materially affect those practices.
Comment by dotdotslash -
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This bill gets my vote. Cuban for Congress?
Comment by josephwesley -
P.S. Go Lakers!
Comment by shodson -
Your title says it all! Bring it on like the proposed ‘Robin Hood’ Tax in the UK where the financial institutions can help fix the problems they caused in the first place. http://www.offyoutrot.co.uk
Comment by doublemadforit1 -
@Mark… Taxing a fixed amount is bad, since that will unnecessarily hurt shares which are priced lower (so a $1 share would get hurt more than a $100 share, although both companies may have the same market caps). A percentage of every transaction amount is a better idea (something like 0.1-0.5%).
@Jeff Nabers – Thats a lot of wrong in a couple of comments. The US was NOT founded on a revolt against taxes. It was founded (and was it really) on a revolt against taxes WITHOUT REPRESENTATION. For some reason a surprising large number of Americans find it hard to remember these last 2 words in a 4 word slogan. Income Taxes as a percentage of income has NEVER been lower than it is now (since it was introduced, obviously). The Reagan years had much higher income tax rates. Also, there is already a proportional tax rate based on how long you hold your capital. The long term capital gains tax is a paltry 15%. Which is why Warren Buffett pays less taxes than his secretary. He hardly ever sells/buy shares, since he holds on to them for so long.
Also, that has nothing to do with what the main issue is. Automated transactions which can cause a cascade of mayhem within milliseconds. A transaction based tax will help reduce this dramatically, which is what Mark is talking about.
Also, almost ALL the money the government makes goes to the people, even if its held by Senators, who spend it on stuff, which goes to people. Wasteful govt. spending is the most effective way to get money out to the people (though not the most productive). What doesn’t go to the people is profits by an “American” company more than half of which is owned by non-Americans. The remaining half of which is owned by people/firms so rich that the marginal income from that firm’s profits ends up on their bank accounts, (or speculation).
Comment by addicted4444 -
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I like you Mark but geez this is bad. What you are proposing will decrease volume more than achieve your goal.
Based on what you seem to want why not be a proponent of a much more aggressive sliding scale on capital gains taxes? E.g., hold stock 1 day or less, gains taxed @ 90%, >1 day and less than 1 month taxed at 85%, etc, etc. Hold more than 10 years, no taxes paid on gains for example.
What you have proposed will give the govt cash in hand basically in real-time, not even as much as making them wait until April 15th to get it. Really bad idea.
Comment by smoothisfast -
Also, taxing anything 25 cents will lead to taking the tax 25 dollars, then 2500 dollars, etc.
Our country grew out of a revolt against taxes. All income taxes were declared illegal.
Then an income tax was passed by saying it would only be applied to the rich. Then there was a small income tax on most everyone, and it’s grown ever since. This is the story of all taxes. Once the principle is surrendered, there is nothing stopping from the tax or the regulation to continue growing endlessly.
Comment by Jeff Nabers -
Mark, do you really think the government is capable of giving its loot to the people?
Comment by Jeff Nabers -
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Now that you’ve made your billions, you want to take more freedom out of the free market?
Comment by ajsmunchkinland -
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If you want to know what happens when regulations make it expensive/difficult to own/trade shares, (e.g. as in a number of countries in the far east) go and learn about “zero-strike options”. If you punitively tax share transactions like this, you’ll just drive traffic elsewhere in the markets. The only difference you’ll make is to reduce liquidity for your “true investors”, making their shares less valuable.
Comment by al451 -
If you tax per transaction, who pays, the buyer or the seller? Or would you double-tax?
Comment by melopt -
Mark, great idea however this is like trying to get people to quit smoking by taxing cigarettes…it might change some behaviors, but eventually the change will reverse itself.
Plus do you really think in today’s government which is basically an offshoot of big banking that they want people to reduce the amount of trades of anything? Companies like Scott Trade, TD Ameritrade are making their money on these day traders at $4 a pop. If people slow their trading, that will put companies helping the little trader out and we will back to the $25-100 trade execution costs of the 80’s.
Comment by kkleinsmith -
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You could easily give a pass to small shareholders by exempting the first $1 million per day of trading.
All the big computerized traders probably hit $1 million within 30 seconds of the morning bell. But most individuals rarely or never trade that much in one day.
Comment by stevenjklein -
The high volume in the Equities market is a result of arbitrage traders trading against discrepencies in the market. This is a good thing, it makes the market more fair and balanced and means that the occasional trader will see a fairer price.
Think about what would happen to ebay, if they charged for every bid being entered into each auction. The net result would be loss of liquidity and worse prices for sellers. The same applies to any market. Sometimes those autmoated strategies, that add liquidity and balance the market, go wrong. Especially if the source of market data doesn’t match the activity on the market.
Transparent markets like the Equities markets are well regulated. Opaque markets like complex derivatives, Mortgage Backed Securities etc, were the cause of the problems with the credit crunch. Adding a price per transaction fee will only drive liquidity off of the official exchanges and onto less regulated ‘dark liquidty pools’. i.e. a step backwards for regulation.
Comment by disrumpere -
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Love the idea Mark. Wish something like this had a chance.
Comment by bluemonk7 -
Companies will just do huge reverse splits. This will drive up the per share prices so much that small investors can’t even consider buying shares.
Comment by onedayonejob -
BY the way, if anyone wants to know the real reasons behind the crash, see here
http://www.zerohedge.com/article/dissecting-crash
The fat finger excuse is absurd.
Comment by smorkingapple -
There is no “liquidity” in this market. This entire runup off 666 has been the big banks passing shares back and forth to each other using the free money the Fed has been pumping into the system. HFT has been the primary mechanism to accomplish this. This is why when the machines picked up their ball and went home yesterday, the market tanked. Then the machines turned back on which caused the runup. This is simply a high stakes game of musical chairs and the little investor will wind up being the one without a chair at the end of the day.
Look no further than the recent financial statements of the big banks. They make their living now on trading, not on traditional banking functions.
Comment by smorkingapple -
If you implement a transaction tax, you will remove liquidity from the system. What happens when liquidity goes away? Look at today’s price action.
Also, let’s look at a few problems with a straight up transaction tax:
1. Would you tax the transition managers that help institutions and pensions work into positions for the best possible rate? They use “algos” and hedging so your 401(k) is more efficient.
From MC> Absolutely. If they are buying and holding, its a non event to them.
2. Would you tax the market makers who have to take the other side of futures and options trades to guarantee a good risk market? If a firm wants to buy protection with options (like you did with YHOO) there is someone on the other side of the trade who has to hedge it off with stock– a tax would pull liquidity out.
From MC> No. Market Makers rarely are long term holders so there is no reason to tax intermediary transactions.
3. Would you tax the commodity firms who act in the best interest of farmers, looking to lock in a certain price for their corn, wheat, or hogs?
From MC> I didnt address commodity or options or derivative transactions.
4. Finally, how would you propose we enforce such a rule when traders and these big, evil corporations simply move to exchanges in other countries? How would you force American companies to IPO in domestic capital markets when there would be much more liquidity overseas? How would you make sure special interests wouldn’t come in and lobby for exceptions for their firm?
From MC> thats the strawman everyone likes to use. Look what happened yesterday when trades went to exchanges outside the NYSE in this country. THey just might trade your stock for a penny. Thats a huge incentive. And in other countries you have currency risk, sovereign risk, and tax risk. I think one of the comments here mentions a tax on transactions in India. The run away excuse doesn’t work.
You may not think that quants or high frequency trading provides any societal value, but you cannot have bureaucrats deciding what professions are more valuable than others. That is morally wrong.
From MC> I tend to agree with you. However, just like you need speed limits on highways, there have to be some rules when there are people who put the entire system at risk. For most of Wall Streets history the goal has been to let people make money INVESTING in companies. The technology age has introduced the ability to exploit every law of unintended consequence, and leverage has lowered the bar of exploitation to basis points. That creates huge risk to the system. If you have a better way to manage the risk, Im happy to read it. My whole point is that the system has to be geared towards investors and away from traders that try to exploit the system
Comment by steveplace -
Before April 9, 2001 stocks were traded in fractions — 25 5/8 etc. — and the minimum spread was 1/16 or 6.25 cents. The SEC then decreed that markets would switch to the decimal system to reduce spreads and costs to the customer. Reduced spreads also made today’s high speed automated trading profitable. Are we seeing an unintended consequence?
Meanwhile, lets not forget that what we think we know about yesterday’s market action is just speculation. Logical but speculation just the same.
Comment by typingtalker -
Oh…and I meant to add:
If you think putting that kind of “free coin” in the hands of Bureaucrats in Washington is anything other than a COLOSSAL mistake, then you need to rethink everything.
All that money sloshing around Washington – looking for a home – will most assuredly NOT end up serving the means in was intended to end. This would be the only SURE THING in your entire proposal. You can take that to the bank.
Comment by seangmclaughlin -
Cubes. I love you. Seriously. Love your blog. Love what you’ve accomplished. Everything. You are an inspiration to me.
However, on this, I have to completely disagree with you.
The “black swan” you’d like this tax to protect us from will effectively be caused by this very tax. While we certainly agree there are some bad actors and bad practices on Wall Street… painting all Traders with a broad brush and punishing them all is a bad bad move.
Remember…without Wall Street, you don’t sell your company to Yahoo for a gazillion dollars and buy the Dallas Mavericks.
Comment by seangmclaughlin -
Couldn’t agree more.
Only problem I see is this might pressure companies to not split their stock. And maybe to enact a reverse split.
and then there goes the tax and incentive to not constantly trade.
Otherwise a great idea.
I think (further) increasing the short term capital gains tax would be just as effective at nipping this computerized day trading in the bud.
Comment by trip1ex -
I agree with your general idea, but not the method. Liquidity could be affected (as it was yesterday) with a .25 fee. It should be a percentage if it is done that way. That would push it off to other countries possibly.
My idea is to place HIGH income tax/capital gains tax on short term gains. If you hold a security for 5 years it is 10%, 1-5 years =20%, less than 1 year 60% (or something). Market makers could get a reduction, but only slightly and with provisions that make something like yesterday more difficult.
Dividends would not be taxed…at all.
The whole structure and point of it, should be to get people to think like INVESTORS and not TRADERS.
From MC> dont disagree. Its something I have talked about quite a bit. If you hold a stock 5 years, it should be tax free.
Comment by disfiguredskating -
mark – perhaps an elegant solution but only in a purely theoretical world. The only real solution (a la The Terminator) is to shut he machines down. These ‘quants’ are under a grossly misinformed illusion that they can create mathematical algorithms that are predictive of the market – but really are no better than your local weatherman – and time and again, during statistically abnormal events that that present variables outside of their self-contained world, their models break down. As they account for an ever-increasing percentage of the markets total volume, they become responsible for greater and greater erratic behavior that is completely machine driven. I love the tax idea – which would basically shut them down – at which point you could pull the tax – but why not just legislate to shut them down up front??
Comment by anticramer -
Mark why don’t you tax every MBA player a million bucks that should take care of it. Yes, I agree black boxes control the markets, but doesn’t mean you should tax traders.
IMO
Comment by bulllives -
Correction to previous comment: It appears that the problem you’re citing was NOT caused by day traders. A little more investigation into a serious situation may be required the next time you attempt to spew your invective on those of us attempting to eek out a meager living on your crumbs…
Comment by Matches Malone -
Fascinating. Jump the rich. If you don’t get the reference, expand your reading horizons. Lemme guess, this tax wouldn’t be retroactive, would it? Are you advocating that you yourself pay more taxes? I thought not.
From MC> I trade stocks. I know when I am trading, and I know when I am investing. It would make it more expensive for me as well. And FYI, before 2001, there was a minimum spread of 6.25 c on every share , plus commssions. So it wasnt that far off
Comment by Matches Malone -
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If you are an investor, why are you upset about what happened? Your companies’ stocks were not fundamentally changed, unless they have exposure to Europe. A mess not created by traders. If you want to blame someone or something blame the HFT.
Comment by sipher8 -
This is a very practical thing.. And its in force in exchanges located in India. http://www.appuonline.com/appu/investment/stt.html
Though 25cents would be on the higher side.
The rates are as follows…
Securities Transaction Tax on Sale and Purchase of Securities
Market Type Current Rate (w.e.f. 1st June ’06)
Futures & Options 0.017%
Capital Market (Delivery) 0.125%
Capital Market (Intra-Day) 0.025%
Comment by wealthcreate -
I was thinking along these lines but taxing something brings lots of republican whining. Maybe restructuring taxes related to stock trades so you pay less taxes the more time you hold on to a stock of a company that has been paying dividends for several quarters in a row.
Comment by vpeters25 -
Nice bit of “jekyll and hyde” act you got going Mr. Cuban.
yesterday it was something totally ridiculous ( to me & most of the folks ) about managing home networks.
Today you turn it around & want to go after the “high frequency traders” ( http://en.wikipedia.org/wiki/High-frequency_trading ).
Agree with you 100% on this and why not bump it to 50 cents or a dollar.
As a long term buy and hold investor ( i know you will revert to the hyde personality now , circa Bogle vs Cuban ) i am all for taxing the computer traders.
Comment by carldupree -
Mark,
I tend to agree with many things that you have said over the years, but you’re very wrong on today’s events and your share-tax plan.
First of all, the jury isn’t out yet on what caused today’s error, and I’m surprised that you’re jumping on the bandwagon pointing your finger so soon. Most likely someone typed in the wrong amount for a sell order, which triggered INVESTORS’ stop-loss orders, in effect triggered more INVESTORS’ stop-loss orders, and so on, pushing prices down. Then a few minutes later, after the stop-loss orders were executed, the market rebounded.
Additionally, why are you comparing the equities and CDS markets? There’s plenty of transparency in the equities market, which the Average Joe invests in, and which relies on liquidity. If you tax each share 25 cents, you’re going to take away a lot of that liquidity (is it by chance that volumes picked up after we did away with the 1/16 dollar and 1/32 dollar increments and moved to decimalization?). Without that liquidity, markets are less efficient, and prices are less accurate.
Furthermore, traders add to this liquidity. No one knows the 100% correct price for a stock, but the more players in the game, the more likely that the market will push the stock to that price. Fair pricing is integral to an efficient and fair market (best kind for Average Joe).
Remember – it’s a zero-sum game, so for every fat cat that makes a buck, another fat cat is losing one.
Also, don’t we already tax the stock market enough between capital gains taxes and taxes on dividends?
Lastly, if a tax like this was ever implemented, it would hurt Average Joe investors the most – the fat cats can afford the added expense, but Average Joe can’t afford to diminish his returns by 50 cents per share (remember 25 cents to go long, then 25 cents to sell).
Comment by ronzember -
it is scary to think the world’s most powerful corporations are owned by short term driven computerized shareholders.
Comment by rebelvc -
Even if this idea of your’s was a reality…. you know.. and I know.. the government would never allow the tax payers to see a cent of it.
Comment by jmw1980 -
Nevermind, I mis-read… The 1 share or 100 million shares threw me off.
Comment by mweber82 -
Great post Mark! One bit though
“If the NYSE, Nasdaq, Amex and OTC are trading 2 Billion shares a day or more , like today, thats $ 500 Million Dollars PER DAY”
You said 25 cents per TRANSACTION, how many transactions do you think those 2 billion shares break down into? If the average transaction is say 100 shares, we’d be looking at more like $5 million dollars per day.
Comment by mweber82 -
Bravo MC!
But 25 cents per transaction isn’t really “taxing the hell out of Wall Street”…just the cost of doing business.
I’d much rather see this type of plan than what’s in the HC Bill and Cap & Tax the Hell out of US!
I’m reposting to my congressman.
Comment by MediaEngineer -
Why per share? A share seems like a pretty arbitrary number, and taxing a flat amount per share might have the same effect as a flat income tax: the weaker stocks pay more to the government relative to the strong ones. Why should I pay the same for a penny stock as I would for GOOG? I think most fees currently done on exchanges are per trade or as a raw percentage, and I think this would be the most prudent way to approach the taxes as well. Either that or seriously reform capital gains taxes.
Comment by Zeke -
nice take MC… I can already hear the backlash.
Comment by thebushreport -
..and use that tax revenue to have pay down the national debt, the whole debt, and nothing but the debt.
Comment by Joseph P. Schmitt -