Mario Gabelli Drinks the Kool Aid

Posted by Jeff Carter
on June 10th, 2010

On CNBC’s Squawk Box this morning at 7:13 AM CDT, Mario Gabelli said he wanted to see a tax on hedge funds, high frequency traders(HFT), and other traders that are in/out traders. I smell a rat.

What possible benefit does Gabelli see for himself if there is a transaction tax?

Gabelli is known as a value investor. Buy and hold. His strategy is not any different than Warren Buffett’s and other investors. Value investors hate the huge volatility that we have seen in markets of late. Gabelli’s point is this; these HFT traders are making teeny profits off the backs of value investors like himself. They don’t create value like the great fund managers. Gabelli flaunts a little hubris on that point.

His reminds me of the lament of customers in futures markets years ago. Farmers used to whine about how independent traders in pits were not creating value and making money off their order flow. They would say, “I grow the crops, all those guys do is make money off me.” Banks used to yelp about traders in the eurodollar pit earning a few points off their orders-when they were the ones really creating value in the marketplace. I can hear it now, “How can a bunch of guys with barely a high school education make money in markets when I have an Ivy League education and investment banking experience?”

This thinking is misguided.

There is risk in making a market. There is risk trading in markets. In the old days, 9/10 would fail at pit trading. Today, it’s probably more like 9.9/10 on the black box. Volume has been consolidated and concentrated. In many futures markets, where you used to have hundreds of guys trading smaller amounts, now you have less than 100 trading massive volume. The same is true in stock markets. There is value in posting a tight, liquid bid/ask spread. Gabelli’s idea makes that critical value go away.

In the cash equity world, there already is a disparity in taxes. HFT traders are taxed at the highest rate, 40%. Long term buy and hold investors are taxed at capital gains, 23.9%. (I am using the new Obama tax increases, get used to it)

The way to change behavior like this is not through a tax. It’s through a structural change in the marketplace. End payment for order flow, end internalization. Let’s see if just those two changes will change behavior in the market. My guess is they will.

I don’t like to see people in the industry advocate for a transaction tax. It is misguided thinking. At the end of the day, Gabelli’s idea would only harm his own clients, and not just the HFT people he thinks are picking his pocket.

UPDATE
Here is a link to the video of Gabelli, 5:45 is the point where Gabelli begins to advocate a tax.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

You might be interested in: