You know where I stand, I hate the very concept of a transaction tax, but if we were to have one, then let me go the "lesser evil" route. Because as it stands, what's been proposed will not work. First the guy who posted about financial markets was spot on. You'll kill what's good about the markets along with bad. Companies need capital, hell the government now needs a stock market because it owns so much stock (as citizens, it would be nice if Uncle Sam made a profit on that stock so it could redeploy that capital to say infrastructure, I'm just saying.). Robert challenged me to come up with an alternative to meet his objections, so I will give it a go.
With regards to markets, you have the institutional players, the commercial traders, the independent traders, and lastly retail. This is tax will kill the independents like myself, many of the commercial traders (lets just say the smaller weaker market makers). This then puts institutional players like the largest banks and funds to the largest commercial traders like Goldman (despite they're recent classification, they're NOT a bank). And then you have you, the retail trader who doesn't actively trade. But at the end of the day, the folks you hate the most will have the ability to bear this cost. And then they will spend their days getting exclusions, and trust me given the corrupt nature of Congress, it would only be a matter of time.
Lastly, given that not everyone is on board with this, you will have a country that will benefit from this. You say it has to be global, well that isn't happening, and you have to accept that. At best, you could get the UK and the EU, possibly the US but I doubt it. But lets say, for arguments sake you get the UK, EU and the US, and I'll even add Canada. Capital will then flow to Asia, and within a couple of years new corporate filings will be established that would appear to severe ties with those above mentioned countries.
Ok, enough of the negative talk, lets talk something positive. Much ado about all that good stuff exchanges and traders like to play with. I will focus on exchange agreements, derivatives, OTC and futures and such. First and foremost, you have the Commodities Futures Trading Commission impose several new regulations.
1) Ban exchanges ability to sell those millisecond "previews." Exchanges like the NYSE and Nasdaq-OMX have made oodles of cash that way, and given folks like Goldman an unfair advantage. Trust me, a lot of us independents hate that as well.
2) Have the Commodities Futures Trading Commission ban all OTC derivatives contracts. All derivatives contracts trading must be on a regulated exchange with a mandatory clearing mechanism. If you can't get a CFTC approved derivatives clearing organization (DVO) like say LCH Clearnet, then the product cannot be traded. Impose penalties, in fact I would make it a federal crime to trade these "illegal" instruments. No clearing, no trading. The CFTC has several DVOs who have a long history of clearing, some going back a century. There really isn't an excuse to not find a clearing house. Lastly, the exchanges themselves will have to eliminate their OTC software divisions. Things like Clearport must end. If they don't wish to trade on electronic exchange platforms like Globex or the pits, then the products don't trade.
3) Have a clear cut mission for the derivatives contract, particularly geared towards hedging. You can allow others to speculate so long as the trades can be properly matched (See above on clearing). But if there is no proper hedger activity, then the contract should be nullified. Also, all derivatives products must originate from an exchange not an investment bank. If, for example, the CME Group will more likely find hedgers for a product than say Goldman who would just focus on their clients.
4) Black pools must be converted into an exchange. The reason a lot of black pools were formed was because 90% of the participants had block trades. Block trades are shares of stock if a factor much larger than the average shares up on the book. Those behind those block trades fear getting found out and getting screwed on a price. Remember, these could be an institutional player like a pension fund trying to unload 250 thousand shares of IBM at one time at a set price. If they posted that on the main book for "I-beam" every trading desk from Goldman to Merrill will be like wolves on a beached whale. Ironically enough, folks like Goldman use it for the same reason. Above all you get anonymity, all one sees is the trades. There is a myth that the shares on dark pools get a better price. That isn't true as the price feed is the same as the exchanges. Instead of several private dark pools, force such trades into a separate exchange like Instinet. You can keep the anonymity, but at least we will no there are all these shares out there. The key is that you're removing the trades from an over-the-counter setting to a regulated exchange setting.
5) Energy derivatives shouldn't have cash equivalents. We have energy contracts that do not deal in any physical product at all, these are called cash-settled contracts. In these situations, when expiration comes, cash is exchanged instead of the physical product. The bulk of cash settled contracts are normally in financial or index futures contracts, which in that case makes sense. This is not the case for energy futures! The reason why I think this is horrible is because you move away from the economic reality of the product and into some financial casino. It started with oil and now it is moving on to ethanol and gasoline and who knows what else. Look at it this way, if you had to worry about finding barrels of oil or ethanol (that's in barrels too, right?) then you won't put on as many trades. Try this as an exercise, look when the first financial oil contracts came out on the NYMEX (now CME) and correlate that with the activity in the price of the underlying. A futures contract should stick to the underlying economics for which it was originally created. It shouldn't be turned into a casino video game who's theme is oil but really isn't.
6) Raise margins on energy contracts. One of benchmark crude contracts is the Light Sweet Crude Oil contract, which represents 1000 barrels of oil, which at the latest prices means the contract is worth $74,500. The margin to open a trade and control one of these contracts is $5,400 or 7% of the value of the contract. You are given almost 14 times leverage for this product. Now yes when you see the price go up, margin rates as well go up, but the leverage tends to be about the same. That shouldn't be for a product like this. Even at $5400, you can get someone with even $10k to play with this thing, and if oil is jumping you'll get more gamblers. Oil shouldn't be gambled on, and also given such a low margin requirement, it also makes it easier to load up on more contracts. While outfits like Phibro (though I think they've dealt mainly in Spot) could still afford to pay a higher margin, they would not get as many. The main thing is to reduce the smaller speculator in this contract. Yes, that contradicts what I've said about liquidity, but oil isn't like the S&P or 10 Year contract nor corn. What the exchange should do is first raise the initial margin to 25% of the value of the contract, then install an automatic increase in margin at the same rate of growth as the underlying product. If oil jumps 25% in two months, so should the rise in margin. You see, eventually margin becomes too costly, and a lot of folks will be forced to liquidate. This starts adding a downward pressure in oil.
7) Rapid transaction trading should be allowed. I know you hate this, but if you implement what I've proposed above, rapid trading will lose most of it's advantages. Remember, it's fast to begin with because they get to look behind the curtain before you do. Take that away, and all you get is an algorithm box that simply is attempting arb situations or buying the bid or attempting to sell at the ask.
8) Establish global clearing and exchange partnerships. There are exchanges that trade similar products that are here, and vice versa. What we don't want is for some investment banker to skip town and trade the same thing in Europe but by different rules for the product. This is in regards to derivatives, they need to be fungible. So if one trades Brent oil on the ICE in Europe, it's the same product here in the US be it on ICE or the CME's Globex. Oh the exchanges will hate this, but it should be made clear with derivatives, the rules above apply to all and it should be global. If the Dubai Mercantile Exchange wants to come up with a sour crude contract for example, well if there is one trading in London or New York, it should comport to those, otherwise they won't get CFTC approval. Now hole in this idea is if say Goldman says screw you I'm trading it anyways and creates an offshore entity and that entity loses money. The only thing I can think of is going back to #2, and essentially charge Goldman with a federal crime.
9) Regarding energy and commodity ETFs, originally I was dead set against these and now iffy, but so far the latter is facing problems and many have actually shut down. GLD on the other hand I think is adding to the run up in Gold. See, it helps in liquidity, and opens the door for folks to buy commodities without actually getting into the futures market directly. GLD is actual physical gold. USO, the oil contract is really futures contracts (actually the front month one only, USL is better because you get the price change over 12 months). The thing is, both are adding buying pressure when the markets are going up, and selling pressure when it's a bear market. On top of this, folks investing in these aren't really getting stuff that 100% correlates with the underlying.
Ok, now on to revenue sourcing. If you do it the way it is proposed in the previous transaction tax proposals, at best you'll get a year's worth at that 100 billion mark. But like that smoker example I saw on here, you want them to keep coming. Add in the proposals above, and you will curtail a lot of the craziness while garnering revenue. To be honest, I hate paying a tax on transactions if I don't make a profit. But since Robert challenged me, I'm gonna grin and bear it and show you how I would do it.
First off, don't take off a percentage of the total of the transaction. You will discourage activity. What you want quantity. The only exemptions I have given is for hedgers in the futures , if you want to include retirement funds, be my guest. Just remember, any additional exemption you open the door of folks like the investment banks to try and get by.
For stocks, you need to adjust to certain price points without discouraging trading. What I would do is for the first and up to 100 shares of stock above $10/share, charge a flat fee of $.10. Now I know what you're saying "that isn't enough." True, but first the fee is virtually hidden, and secondly market makers won't bother gaming the bid/ask on such a low thing. So what's to stop them from buying 99 shares? They still pay it, every and up to 100 shares. Now when a stock reaches $50/share, I would say a flat fee of $.50. For stocks $100 and above, smaller traders will go towards the options, but for those that do trade then $1 flat fee. Now, if you want a higher turnover, those trading a 1000 shares or more would get a 50% discount. While on the face of it, you make the same amount, but if they think they're getting a deal, trust me they will actually trade more.
For options on stocks, same deal except you're tacking on the fee onto the premiums and not the strike prices. If you went for the latter, you may end up discouraging trading at certain strikes. Remember, you want quantity and turn over. Premiums at $.01 to $1 are the same as a stock trading at $1 to $100, the "fee" is a flat .10 cents/contract. For any premium above $1, a flat fee of $.50/contract. When and if they wish to exercise the options, it shall be regarded as a new stock transaction and the fees to that shall then be applied. With regards to stock index options with multipliers of $100 like the SPX and NDX , a flat fee of $.50/contract at all strikes; the newer mini stock index options with multipliers of $10 like the DJX, a flat fee of $.10/contract.
Now we get with futures contracts. With some contracts you get a lot of turnover, while others almost nothing at times. A flat fee of $1/lot, for front month or "actively traded" contracts (these could vary, for instance you have active contracts in the Eurodollar all the way into 2010). You could alter this for energy contracts, peg that fee increase to the increase in of oil for example. Outside of these, a flat fee of $.50/lot. Hedgers in agricultural products like corn, who make delivery (take note Goldman, you can't just buy some corn store it in a silo and call yourself a farmer) or use the product for commercial usage, can gain a tax credit on these "fees." I know some of you will not like the fact that Monsanto could take advantage of this, but I'm trying to avoid using these fees as an excuse to hike up the price of food.
Options on Futures are a flat $1/contract (Put or Call). If exercised, it will be treated as a new futures trade. Credit for commercial hedgers apply here as well.
Also, for options for stocks and futures, if you're attempting a covered call or a buy-write at once, the fee could be applied to whichever is greater. Or, you could apply it to both, even though many consider it a single transaction if done at once. I can see the legal challenges by brokers on that one.
Treasuries and bonds should also have a fee, I would say a sliding scale, the longer the maturity the smaller the fee, start at $1/bond or every $1000 worth of bonds. Yes, it may discourage some from participating, but there is still a ton of demand for government debt. Like the futures above, $1/bond for any maturing under 5 years. The reason why I picked 5, is our foreign creditors seem to be going for shorter term maturities, even the 10 year is getting the shaft. Nuts to them I say.
You may have noticed that I didn't separate things like credit derivative swaps or gold or the S&Ps. The fact is a derivative is a derivative, the only time I did any segregating was with the options. That was because they're priced differently. A credit default swap, if it is forced onto a regulated exchange, will be standardized. Thus one default swap contract is just about the same as one S&P contract, just the terms are different.
Forex/spot currency trading on the retail front have a weird setup with regards to units of currency traded. Outfits like Oanda let you pick the amount, even one unit (like one single Euro or Yen), while others like FXCM have set amounts. What I've noticed is that the popular amounts tend to either be 10k units or 100k units. For the retail FX trader, we need to enforce some standards here, I would go with a minimum of 10k units. There is also the issue of leverage, with the ranges being between 20x to 400x, though some let you even set it to 1x. Here again, the popular leverage defaults have been either 50x or 100x, there needs to be a standard but we can actually use this for the fee structure. It should be a tiered structured tied to leverage. Tier one (lev. at 20-50x) fees are $2 per 10k units, $20 per 100k units. Tier two (lev. at 50+x - 100x) fees are $4 per 10k units, $40 per 100k units. Tier three (lev.100+x - 300x) fees are at $10 per 10k units, $100 per 100k units. Tier four (lev. 300+) $20 per 10k, $200 per 100k. You can see here what I'm doing. I've seen a lot of retail traders fall for that ubber leverage and get wiped out. It's really a trap, and should be discouraged.
Hedgers get the exemption, but the CFTC will have to update what qualifies for such a title. The last thing you want is an investment bank, for example going out and buying oil on the spot market and storing it, operating the whole thing under a subsidiary "energy company." If said investment bank says it is working on behalf of a client, then the i-bank DOES NOT get the exemption nor the subsidiary, but the client itself.
Compared to the other transaction tax bills, on the face of it, the revenue generated is smaller. The thing is, here you maintain the capital markets. You won't get a collapse in liquidity because the fees are so small it's almost negligible. What you want is turnover, and so you want the cost of doing so to be very low. Under the other proposals, this would drop and then in the end you would not have revenue like you thought. My goal was for long term income streams. It is important that the first 9 regulations be met.