The one tax that would rein in Wall Street…

kristy Reforming Global Finance

‘Goldman Sachs’ Quiet Meeting in China

Ride Big Oil For Huge Gains Now

Since Private Briefing launched back in August, our mantra has been consistent and clear: Invest in energy now while prices are still low. We’ve said it time and again. And those who listened are making a killing. Oil is up 13% in the last four days alone. Make no mistake: If you want to get ahead of the energy curve, you don’t want to sit another minute. Click here. In today’s Private Briefing global energy expert Dr. Kent Moors tells you the one energy play that could make you a fortune right now.

October 11 2011

The One Tax That Would Rein In Wall Street

By Martin Hutchinson, Global Investing Strategist, Money Morning

The European Commission (EC) on Sept. 28 proposed a Tobin tax for the European Union (EU). It’s likely to pass, in one form or another, but it won’t stop there.

The United States will be next – and as investors we should be grateful. I just hope policymakers make one key change first.

I’ll explain.

I penned a column for Money Morning almost exactly one year ago that said major world economies should adopt a “Tobin tax” – a small tax on financial transactions, named after its inventor, Nobel laureate James Tobin.

It’s always nice – albeit unusual – when politicians take my advice. And I’m certainly glad that the EC is doing just that. But the commission still hasn’t gotten it quite right.
A Promising Proposal

You see, the Tobin tax I proposed would be at a very low rate, perhaps 0.01%. Apart from raising revenue, its main effect would be to inhibit speculation. By that I specifically mean “high-frequency trading,” or HFT, where computers trade bonds, stocks, and derivatives in milliseconds.

High-frequency trading is objectionable for two reasons.

First, its proponents claim it provides liquidity to the market, but that’s not really the case. In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it.

The second reason high-frequency trading is bad is that it uses machines to get trade information before competitors. Of course, trading based on extra-fast knowledge of the trading flow should qualify as inside information, and thus be illegal.

Unfortunately, it can’t be made illegal, because market-makers do it all the time. And what’s more is that stock exchanges make huge sums of money by renting space within feet of the exchanges’ computers to high-frequency traders.

And that brings us to the tragic flaw of the EC’s proposal.The Tobin tax proposed to the European parliament by EC President Jose Manuel Barroso would impose a 0.1% tax on stock and bond transactions and a 0.01% tax on derivatives trades.

It’s backwards.

To continue reading, please click here…

Click here to read the newsletter