Taxing Stock Sales Will Hurt the Stock Markets

Economy: Our ever-expanding government and its enablers will tax everything that moves - and everything else. Their newest idea - taxing stock sales - ultimately hurts not the rich, but those who seek jobs.

Democratic Rep. Peter Welch of Vermont, a senior member of the House Oversight and Government Reform Committee's subcommittee on financial services, wants Uncle Sam to start taxing stock transactions.

Interviewed by disgraced ex-New York Gov. Eliot Spitzer - also known as "Client No. 9" - about imposing "a tiny little tax when stocks are traded on Wall Street" to "raise a huge sum of money and it would get rid of some of the high-velocity trading that does harm to the markets anyway," Welch touted his bill, co-sponsored by Rep. Peter DeFazio, D-Ore., to tax stock sales.

But rather than emphasize soaking the rich, Welch claimed with a straight face his tax would be healthy for the stock market. "This hypertrading," Welch said, is "about market speculation. It has nothing to do with liquidities in the market." Therefore "we should have a very small, fractional transaction tax" to discourage computer-assisted high-speed stock transactions.

In fact, high-frequency trading, which constitutes about 60% of trading volumes in U.S. equities markets, is in today's high-tech age a vital tool ensuring liquidity.

Tradeworx, the New Jersey-based high-frequency trading firm to which the Securities and Exchange Commission is now turning to educate itself on computerized trading, in 2010 warned the regulatory agency that "HFTs are the liquidity backbone of the market" and "an important part of the market's ecosystem for serving long-term investors."

Traders "benefit from volatility," Tradeworx noted.

A 2009 study from the University of Washington, UC Berkeley, and the University of Ontario Institute of Technology, plus another from the U.S. Federal Reserve, found that high-frequency trading lowers volatility and takes stock prices closer to their real fair value.

As Cameron Smith, general counsel of Quantlab Financial, a Houston-based trading company, notes, computerized trading actually emerged to combat fraudulent trading abuses regarding stock prices in the 1990s.

High-frequency traders "relied on technology and detailed analysis to provide better prices to investors," Smith wrote in Traders Magazine. They also helped democratize the ownership of equities.

"Instead of being clustered in lower Manhattan, they were spread out all over the country." Smith pointed out. "The traditional, uncompetitive Wall Street market maker model was replaced and the exchanges were transformed to open, fair and transparent electronic marketplaces."

When you tax anything, you get less of it. Do we really want less of a stock market than we have today?

Beside, like anything else, if efficient markets are taxed - and don't think a "tiny little tax" won't, like every other tax ever invented, soon become big - the costs won't be borne by the rich. No, they'll be borne by average people, who will find fewer jobs, lower incomes and smaller retirement accounts as a result.