An editorial in today’s New York Times calls for a financial transactions tax – a tenths of a percent charge on the market value of every trade of a stock, bond, or derivative. My Working Papers column two years ago described the pitfalls of such a tax. While tax rates in the range of tenths of a percent sound small they would have large effects on stock values. Bid-ask spreads are now 1 cent for large cap stocks. A 0.10 percent tax would add 5 cents to the spread for a $50 stock.
The alleged purpose of such a tax is to reduce the arms race among High Frequency Traders who exploit differences in the timing of bids and offers across exchanges at the level of thousandths of a second to engage in price arbitrage. In the Fall 2015 issue I review a paper that demonstrates that this arms race is the result of stock exchanges’ use of “continuous-limit-order-book” design (that is, orders are taken continuously and placed when the asset reaches the order’s stipulated price).
Read more at http://www.cato.org/blog/financial-transaction-tax-would-be-damaging
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