Sunday, February 22, 2009

Trader tax proposal will be the death knell for statistical arbitrage

U.S. Congressman Peter DeFazio, introduced H.R. 1068: “Let Wall Street Pay for Wall Street's Bailout Act of 2009”, which aims to impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stock, options, and futures.

Ladies and gentlemen, 0.25% is 50 basis points round-trip. Few if any statistical arbitrage strategies can survive this transaction tax.

And no, this is not "Wall Street paying for Wall Street's Bailout". This is small-time independent trader-entrepreneur like ourselves paying for Wall Street's Bailout.

Furthermore, this tax will drain the US market of liquidity, and ultimately will cost every investor, long or short term, a far greater transaction cost than 0.25%.

If you want to stop this insanity, please sign this online petition.

10 comments:

Matt Busigin said...

Signed, and paid for the delivery of the physical letter.

This is insanity.

Anonymous said...

There's actually 2 bills in congress now seeking transaction taxes. The 2nd one is to help pay for some new healthcare. You can stay up to date with the issue here. http://www.elitetrader.com/vb/showthread.php?s=&threadid=150546

MachineGhost said...

This trader tax proposal reminds me of the Automated Payment Transaction Tax, see http://www.apttax.com/index.htm in character. But of course, the proposal would add insult to injury as all the other taxes are not being eliminated. Optimistally, perhaps the proposal is the first glimmer of common sense going into tax reform...

vlade said...

Without reading the proposal, how's this different to 50bp stamp duty on stocks in uk? and I think there are statarb traders on footsie...

Ernie Chan said...

Vlade,
That is a good question. We investigated trading in UK and gave up the effort because of the stamp duty -- I am sure a lot of statarb traders did the same. But perhaps others use strategies that hold much longer period.
Ernie

Ernie Chan said...

This is a comment from a UK reader:

Most statarb people in the UK use CFDs which are exempt from stamp duty.

The question is whether CFDs or some such similar derivative instrument
would be caught up in the net of what is being proposed in the US?

I'd also welcome any comments on the likelihood of this legislation ever
being passed.

JR

Newton Linchen said...

Ernest,

We are solidary.

If this bill pass, we invite you to trade in Brazil. :)

tim said...

Ernie,
I spoke with Don Bright of Bright Trading both him and his brother Bob have been option and futures market makers in the past and having spoken to other coleagues they believe the bill wont get passed , simply because it will kill the markets overnight period, they would seize to function because market makers and specialists who operate on razor thin profits wont be able to operate and the other factor is that securities can easily be listed in foreign countries such as london or elsewhere so they would de-list in the US and go away.
He believes if a bill does go through that certain groups such as market makers, specialists, member firms and other licensed traders would be exempt , does that mean that a firm like Renaisance Technologies with its high frequency trading have to register as an official market maker ? who knows ...

Anonymous said...

This guy in Oregon should take a plane down to the East Coast and figure out how Wall Street really works.

This bill would just kill the markets overnight. If I were him, I would go further and simply prevent anyone from selling a stock...ever!

When you think that you pay taxes to pay the salary of such a...

Too bad I cannot sign the petition more than 1 time.

Best,
David

Anonymous said...

The tax will only be on purchases, so it turns out to be 25bp (like SEC fee) for buys only. Not 50bp per round turn. But I think it is a bad thing and will dry up liquidity and shut down venture capital.