Charles Schumer has proposed a really novel idea to make markets better.  A tax on liquidity.  This is beyond idiotic.  It’s populist politics at its finest.

The logic behind a tax like this is so flimsy, it’s hardly worth exploring.  However, transaction taxes are included in every presidential budget.  Various unenlightened members of Congress bring them up from time to time.

I once figured out that a transaction tax of .05/trade would cost me pretty close to $50,000-$80,000 dollars back when I was actively trading eurodollars.  It’s a lot of cabbage.  If the tax were enacted, I would have quit trading in the US on the spot.  There are plenty of other markets, Singapore, Hong Kong, and London that would appreciate the liquidity traders provide.  Because those markets were on a screen, I didn’t have to physically move to get there.

The problem with the industry is not HFT traders, speed, electrification of markets or  newer innovations like that.  The problem is the marketplace structure.

The bid/ask spread in a market ought to be the most competitive thing in the marketplace.  In the SEC world, the bid/ask spread is secondary.  The venue on which the trade is made is more competitive.  That’s why the NYSE and NASDAQ only do around 20% of the volume.  Dark pools, internalization, payment for order flow and private networks not accessible by everyone else do most of the volume.  In addition, information from these networks isn’t necessarily public, so the market trades with one hand tied behind its back.

No one has the cojones to change the structure of the market place because the campaign donations that would cease from changing it would be like damming up the Mississippi River.

Local traders trading their own money and HFT guys aren’t a helluva lot different.   They cut the salami pretty thin.  A small change in fees affects profitability.  Senator Schumer’s bright idea to enact a transaction tax on HFT traders is pretty dim.  It will chase liquidity out of the US and open up an opportunity for foreign competitors to take US markets out of the US.  His tax will be a job killer.

Markets without liquidity make everything more expensive, because the bid/ask spread gets wider.  Think about how many trillions of dollars the US government will have to pay in extra borrowing costs if the bid/ask spread in US Treasuries gets wider than the 1 tick width it has today when Senator Schumer gets his tax.  The cost to finance the debt might double.