Security Traders Association
STA Opposes
Proposed Congressional Bill H.R. 1068
(New York: February 23, 2009) The Security Traders Association (STA), the leading advocacy and education organization for professional equity traders in the U.S., today stated its strong opposition to a bill introduced by Congressman Peter DeFazio, H.R. 1068 the “Let Wall Street Pay for Wall Street’s Bailout Act of 2009.” The bill aims to impose a 0.25% transaction tax on the "sale and purchase of financial instruments such as stock, options, and futures." The proceeds of this tax are to pay for the “net cost” TARP and emergency Federal Reserve programs.
In an open letter, the STA registered both its strong opposition and the rationale for its position. The STA demonstrates that bill is based on erroneous premises and misstatements of fact and could lead to serious disruptions in the capital markets at a time of national crisis.
A synopsis of the STA’s position follows:
Wrong Facts:
The bill is based upon a claim that the $700 billion TARP is intended to “protect Wall Street Investors; therefore, the same Wall Street investors should pay for this infusion of taxpayer money.” In fact Wall Street investors have lost an additional 30.2 % of their investments since the passage of the TARP on October 3, 2008 as measured by the S&P 500 index. Infusions of money under the TARP have been accompanied by the government’s protection of taxpayers in the form of its receiving warrants and preferred stock, as well as imposing restrictions on compensation and mandating corporate and operational changes at the institutions. The TARP has been used by the Treasury Department to stabilize the banking system and prevent an unprecedented economic meltdown. The monies approved and spent under the “TARP” authority has not been used to protect investors or Wall Street, but instead to protect Main Street and the financial system.
The premise of the above flawed “findings” is even more troublesome. Suggesting
that Wall Street Investors caused the turmoil facing the economy and the
markets shows a blatant disregard for the facts. Responsibility for the current
situation can be assigned to many different players in the economy: consumers
taking out a mortgage they could not
afford, mortgage broker industry practices that resulted in loans being made
without adequate verification of income and financial condition; the mortgage
lenders who were forced to compete with government subsidized competitors; the
existence of an unregulated secondary markets for mortgage backed securities
that allowed lenders to shift the risks of originating loans, knowing they
could be removed from their balance sheets through securitization; credit
rating agencies that failed to adequately assess and report the risks of default
of securitized products; and the national policies of promoting home ownership,
which while laudable, did not take into account the ramifications of promoting
home ownership to people who might not have the financial resources to afford it.
Wrong
Target:
The incidence of the tax fall squarely on the very victims of the financial
crisis who have seen the value of their investments decrease by 40-50% over the
last year, that is, individual taxpayers, savers, small businesses, endowments
and those relying on retirement plans. This legislation purposely hits these
victims of the meltdown one more time, asking them to pay for a financial
bailout of a market meltdown that they did not cause.
Ill Timed:
It is a tax on capital formation and especially targets the final frontier of
liquidity in the financial markets marketplace, the stock, options and futures
markets. These markets have been remarkably resilient and liquid in a time of
extreme stress and illiquidity. These exchange markets should not be taxed, but
should be applauded for being able to function in the manner for which they
were designed in such tumultuous times. This ill advised tax will be aimed at
these important national market centers and will hurt their ability to remain
highly liquid. In short it may worsen the financial crisis.
Will Hurt the United States at a Time of Extreme Financial Stress:
The rate the bill would impose---0.25% is very large and meaningful—and will
most certainly drive stock, options and futures trades offshore to foreign
venues. For example, a $10,000 trade (or approximately 100 shares of stock in
Apple, Inc.) would increase the cost of a round trip transaction by $50, which
is a very large amount in a trading environment where fractions of a cent
profit are the norm. Likewise, a Eurodollar contract is based on a notional
$1,000,000 and 0.25% of that amount is $2,500. By way of reference, an exchange
may charge about $0.08. These very large tax burdens will result in less
trading activity, less saving and investment, and most certainly less business
in the United States, thereby damaging the United States' position as a world
financial center at the very time that the U.S. is experiencing extreme market
distress.
The Bill will Impair Liquidity and Price Discovery
By adding to the execution costs of an individual trade, the transaction tax
would greatly increase the cost of doing business for the essential liquidity
providers on U.S. futures exchanges. These market makers, whose constant
participation and rapid turn-over is the major source of market liquidity,
operate on razor thin margins. Many of these market makers are at the
margin of profitability. This tax will expose them to the choice of
continuing on the exchanges at a profit level unjustified by the risks assumed,
or taking their business elsewhere, or simply to close their doors.
The exit of liquidity providers means decreased efficiency of the markets,
wider bid ask spreads, more volatility and less facility for other market
participants to make effective use of markets. Moreover, stock, options and
futures markets provide significant benefits to market users and to persons
seeking meaningful information, including pricing, in order to guide their
decision making on investment, crop planting, herd management, etc. The deeper
and more liquid the market, the better the price discovery and related
information provided. Impairment of liquidity lessens the value of the
information and the functioning of a market based economy.
-END-
For further information,
contact:
John Giesea
President and CEO
Security Traders
Association
212.867.7002
or
Terrence Mulry
Mulry Consulting LLC
201.891.1853
917.860.8137
tmulry@att.net
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About the STA
The STA is a worldwide
professional trade organization that works to improve the ethics, business
standards and working environment for our members. There are approximately
5,200 members, all engaged in the buying, selling, and trading of securities.
Members participate in STA through 26 affiliate organizations and represent the
interests of the trading community and institutional investors. The STA
provides a forum for our traders, representing institutions, broker-dealers,
ECNs, and floor brokers to share their unique perspectives on issues facing the
securities markets. They work together to promote their shared interest in
efficient, liquid markets as well as in investor protection.