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The Most Important Thing in the World
As I write this, I am watching the Mets play the Dodgers and not watching the Democratic debate. I can catch the highlights on Twitter. I am half expecting someone to propose a tax rate of over 100%.
Something I’m sure will be suggested at some point is a financial transactions tax, a tiny tax placed on every single financial transaction: stocks, bonds, and derivatives.
For example, if General Electric (GE) were $20 per share and you bought 1,000 shares, that would be $20,000 worth of stock. If there were a financial transactions tax of 5 basis points, you would pay $10 in tax on that trade. The commission is probably around $10 if you use a discount broker, so it would double your transaction costs.
$10 doesn’t seem like a lot.
A financial transactions tax (otherwise known as an FTT or a Tobin tax) is so attractive to left-leaning politicians because they look at this giant pot of money, the trillions of dollars of annual trading activity, and if you take a tiny percentage of that, 1 basis point or 5 basis points, you can raise a lot of money to… well, certainly not to pay down the deficit; nobody wants to do that.
Some people also view this as a way to “punish” the banks, though in practice, it doesn’t really work out that way, which we will discuss later.
The Good Old Days
Back in 2006, I used to make locked markets in trades as large as 1,000,000 shares of the SPDR S&P 500 ETF (SPY). I would give customers a choice of whether they wanted to buy or sell 1,000,000 SPY (at the time, about $125,000,000) at the same price, essentially letting them trade for free. I could do that because my cost to hedge, either in futures or in the basket of stock or even the ETF, was minimal.
We were awash in liquidity.
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Source: http://silveristhenew.com/2015/10/15/the-most-important-thing-in-the-world/
