I am thoroughly convinced that politicians, as a whole, don’t know jack about finance: Congress is actually considering a 0.25% tax on equity trades. I’d like to repeat that. They would like to levy a tax on all stock, option, and futures trades, of one quarter percent. Apparently they want to drive away all the evil day traders and speculators. This is retarded.
I’ll save the rant on speculation for later, and focus on day traders. Day traders make their money (or lose it, as the case may be) by making many, many trades, for fairly small profits… a good trade might be one or two percent over the course of minutes or an hour, with the majority of trades being far less (<1%). With a 0.5% round trip tax on trading, the profitability of day trading ceases to exist, and they all go away. The result of this would be a very dramatic drop in trading volume. See, the nice thing about having those day traders around is that they provide liquidity of equities — that is, when Joe Schmoe wants to trade a stock in his 401k, there’s always another trader around willing to snap up those shares. With volume and liquidity come ‘fair’ prices and easy trading. Without it, you will see large spreads (such as in low-volume options, where the bid/ask spread can be as high as 10-20% of the options price, or more) and even more and larger price gaps between close and open of markets.
Ostensibly, this tax would have the ‘bonus’ of cutting down on manipulation. Riiiiight. That’ll work.. except not. The other thing about high volume and liquidity is that it makes prices much harder to manipulate. For example, take a look at the following chart for SDP, a fairly new and thinly-traded ETF based on utility prices:
This thing has been whipped around like bronco on meth. Now, imagine if this was happening with S&P500 companies. What, you thought we already had too much volatility? Pussy.
One final note. There are a lot of people out there who have been trading on the side for years, and are pretty good at it. Recently, some of these people are finding themselves out of a job, and are trying to make it on their own, trading for a living. It’s already hard enough to pull a profit; please, let’s not make it worse, and put another nail in the coffin of the American Dream.