Who would have thought the European Union could come up with a tax that every average American investor should embrace?
Well, whatever the motivation, the bureaucrats in Brussels have done it. Under a current proposal, which is very likely to be put into effect in 2014, big trades (more than 10,000 euros, or roughly $13,000) would be subject to a tax of 1/10 of 1 percent.
Sounds like small potatoes, but as market maven Barry Ritholtz correctly suggests, it could be a major game changer in the way the markets operate — especially here.
That’s because the tax could put the kibosh on high-frequency traders (HFTs): hedge funds, banks and other investors who use their capital and high-speed servers to gain a micro-second advantage over the rest of us.
By some accounts, all this fast money accounts for 50 percent to 65 percent of the daily trading volume on most market days, accentuating swings and juicing up the volatility and volume on Wall Street.
On top of that, the speedy traders typically go home holding no long positions. Unlike the rest of us, they have no skin in the game.
Traders with their high-speed servers near those of the Nasdaq and New York Stock Exchange can front-run the rest of us. As Ritholtz notes, “This stresses the entire plumbing of the electronic markets, raising costs for everyone else.”
Opponents of these shenanigans — and there are many — hope that the US will join the Europeans in taxing the practice out of existence, but the Securities and Exchange Commission could end the party right now by reimposing the uptick rule on stock trades.
That rule, which was put into place back in the dark days of 1938, required that every short sale of stock be entered at a higher price than the previous trade. When the SEC dropped the rule in 2007, volatility took off, and high-frequency traders went into high gear.
If approved, Mary Jo White, President Obama’s pick to head up the SEC could get off to a fitting start by reinstating the rule and upending the high-frequency traders.
By doing so, she could one-up the Europeans and restore a more stable framework to the markets without ever levying a penny in taxes.