Explanation of Fast Trading Techniques

[TraderD]

Originally Posted by Kel108

Another thing I noticed on the defending trading site is that proposed tax in the house ways and means on futures transactions - hope it never makes it out of committee...be diasterous in my opinion. Already wrote my elected officials on that one.

If the Financial Transaction Tax is passed it will effectively eliminate short term trading. I don't know of any trader who can overcome a 0.25% tax on every buy or sell of a financial instrument. If it does pass, I'm sure the big brokerage houses would somehow be exempt so that they could continue their game. It's sad that a Congressman from Oregon thinks that screwing over individual traders is going to punish Wall Street for a financial crisis that was created due to home mortgages. Unfortunately, stranger things have happened so the best one can do is express their opinion to their local elected representatives.

Regards,

TraderD

[Bruce DeVault]

A Tobin tax seems quite improbable at this time. See for instance the Wall Street Journal's latest comments:

LONDON (Dow Jones)--Several European countries have put their weight behind a proposed global tax on financial transactions as a means to pay for future crises but the idea is almost universally opposed by financial institutions, according to Greenwich Associates, the research company.

The company said a survey it conducted showed that 93% of companies and financial institutions oppose the idea of a transaction tax, often known as a Tobin tax after Nobel-winning economist James Tobin who proposed a tax on foreign-currency transactions to reduce volatility in the 1970s.

The greatest support for the idea lies among European companies where 12% of those surveyed were in favor while, in some other regions, opposition reached almost 100% of companies, according to Greenwich Associates which polled 190 companies in North America, Europe and Asia from Jan. 11 to Jan. 15.

"In all regions, corporations and financials believe the imposition of a Tobin/transaction tax would have a sharply negative impact on investment returns, market liquidity and pricing and on companies' ability to raise capital," said Andrew Awad, consultant at Greenwich Associates.

U.K. Prime Minister Gordon Brown proposed to other countries in the Group of 20 industrialized and developing nations in November that a Tobin tax should be developed on wholesale market transactions to pay for the costs of bailing out banks in future. Germany and France have signaled their support for the idea.

A global agreement on a Tobin tax is less likely, however, since the U.S. administration outlined plans to introduce its own levy on bank lending risks to pay for costs of the current turmoil. This means the government is unlikely to want to burden its banks with another tax, say some regulatory consultants.

Remember also what a cynic might call "the real golden rule" - which is that he who has the gold makes the rules. Ergo, if a proposed tax would make a significant negative impact on Goldman Sachs' revenues, I think it's reasonable to conclude that it will not pass US Congress anytime soon. You might be tempted to say "well they'll just exclude Goldman Sachs from the rule" but who would they then trade against? The major market players need small players to participate in the markets in order to succeed - that's who they are trading against (successfully). Any liquidity provider needs liquidity consumers and it's for that reason among others that major limitations being introduced seems vanishingly unlikely.

[Kel108]

What's worse is the transaction tax would go toward the TARP bailout which already uses tax payer money to essentially bail out the bond holders of corporations. As Dr. John Hussman so nicely points out...

"It is essential for the public and policymakers to understand that the "failure" of a financial institution does not generally imply losses to customers or counterparties, but only to its stock and bondholders."

The fed programs bails out the bond holders and stock holders...at tax payer expense - clearly unsconstitutional actions by the government...just amazing and scary this even happens

Here is a great article and source of the above quote entitled "a blue print for financial reform"
http://www.hussmanfunds.com/wmc/wmc100125.htm

Of course the exchanges already levy a pretty fat fee on transactions...

[Bruce DeVault]

Well, to the extent that's true, it's a simple application of the golden rule described above.