I have to chime in on this topic as it is getting some cyber press in chat rooms and websites.

There is a proposal floating around out there to put a 0.25% tax on securities transactions. It does not sound like much. But it is not on profits made. It is on value of the transaction.

You can read up on exactly what it means and how it works elsewhere. I have a point to make here.

The government assumes it will raise $100 billion per year in added revenue. Are these out of touch pencil pushers that stupid? They assume that there will be no change in behavior of investors and traders. Let’s see, this insignificant tax will kill the day trading business as it eats up the razor think profits these people strive to make.

Who cares about day traders? Everyone should. Day traders, swing traders, hedge funds and anyone else who does not buy and hold forever create liquidity.

Who cares about traders and the volatility they cause? Everyone should, not for the volatility but for the fact that a robust secondary market is critical for the primary market to function. Why on earth would an institution buy an IPO if there were no readily available market to sell into if needed? Companies would have no capital market to tap to raise funds.

Isn’t the whole point of the stimulus plan to create liquidity? A transaction tax will reduce liquidity and, as another blogger wrote, cause securities related firms to go out of business and lay off more workers.

Here is a quote from a market analyst who gets it right, Chris Carolan:
“I’ve often said that a requirement for an economics degree should be time served in a trading pit with at least 1/2 their net worth riding on a wing and a prayer. All that rational market nonsense would go in the trash heap where it belongs.”