Mark Cuban: place a 25 cent-per-share transaction fee on Wall St. trades | Hacker News Reader

Mark Cuban: place a 25 cent-per-share transaction fee on Wall St. trades

wallstreetpit.com

49 pointsdavi56 comments

For whatever reason, Mark Cuban seems to feel that the only legitimate form of investment is long term speculation:

If you don’t think the company you are buying is worth at least a quarter more than what you are paying, why are you buying shares?

But markets need more than long term speculators. Suppose you want to sell shares to cash out of your long term speculative investment. Who do you sell to?

If another speculator wishes to buy shares right now, there is no problem. But what if the other speculator wants to buy next week?

Enter market makers. They buy from you right now and sell to the other speculator next week, making money off the spread and taking the risk that prices will move unfavorably in the short term. Everyone gets to execute their trades almost immediately and this makes the speculative activity which Mark Cuban favors much easier. Why is this activity deserving of being taxed into oblivion?

A per-share tax makes no sense, because a share is an arbitrary measurement. This would effectively be a regressive tax on small-time investors.

As Cuban himself mentions, it would put pressure on companies to do reverse splits. But I believe he underestimates how much pressure. You'd see stratification, with most companies issuing the A-class big investor shares with prices in the $10s of thousands ($100s?) and B-class cheap shares.

Middle class people buying small amounts of cheap shares in retirement plans would pay the bulk of this tax.

You could limit this tax to short term trades so it wouldn't penalize long term buy and hold investors.

Yes, the simplest solution is a 0.1 % tax on short-term trades. It's actually pretty strange that practically everything else one buys is taxed by the government but not shares. No surprise that we get all this useless and dangerous high frequency trading, and an obscenely large financial sector.

Capital gains on shares are taxed. Short term capital gains are taxed at a higher rate.

Futures contracts are considered long-term capital gains, even if held for short periods of time.

I was thinking the same thing. Wouldn't a percentage tax make more sense? If you just require a 1% tax on all transactions, it would basically be equivalent to what Cuban was saying (he mentioned a $0.05 tax for shares under $5), and it wouldn't pressure companies to do reverse splits. Even people who trade frequently (e.g. 1-2 times a day) wouldn't likely see much cost associated with this.

This would have to be accompanied by new regulations on derivatives and dark pools, but on the surface it doesn't seem like a bad idea.

Currently, all major banks have:

1) Shadow markets setup (dark pools) to allow big investors to take positions without anyone knowing.

2) Servers sitting beside the exchange that get to see all trades before the public does.

Neither of these things should be legal.

I don't know if I believe that high-frequency traders provide a necessary liquidity. I can see both sides on that, but I think we will never know until we impose a tax like Cuban is suggesting. If we don't like the results, we can always repeal the tax.

A 1% tax would still be huge. Traders measure trading cost in basis points (100ths of 1%). Such a tax would affect not only high-frequency traders, but also all market makers and even long-term investors like pension funds and mutual funds.

To operate an index fund, for instance, you have to buy and sell millions of shares everyday. A 1% tax would make impossible to operate an index fund cheaply.

Cuban's proposal is not serious. Yeah, I know he's rich and all, but he doesn't understand how the stock market works.

I think he understands it just fine. Implement a tax that requires people to actually buy stock for reasons other than its price. Make it too expensive to trade millions of shares every second to make small fractions of a return. Make people buy shares because they want to see the company succeed, not to make a quick buck.

Back to basics. I kind of like the idea.

More like back to the stone age. Look at the Indian stock market: they have transaction taxes on the order of .01-0.1% and the bid-ask spreads are huge. A tax like this would make it even more difficult for average people to get a fair price.

> Implement a tax that requires people to actually buy stock for reasons other than its price.

Huh?

I buy stock to make money. I make money when I buy at a lower price than I sell said stock. Note that price plays a role in both transactions.

Serious question - who buys stock for reasons other than price expectations?

Some people buy (a small number of) stocks for dividends. But that's very rare, since dividends are taxed twice while capital gains are taxed only once.

I don't think you understand that people who make markets (add liquidity) decrease YOUR investment costs. These market makers can only trade millions of shares per second (a vast overstatement) IF there is actual demand for that. Suppose there is such demand. Then, the market makers are providing a valuable service by supplying liquidity for people who want to buy or sell.

A sales tax would vastly increase costs for everyone involved. Your parents pension fund would generate lesser returns because it costs them more to enter and exit positions. Your "back to basics" quip is bullshit. What does "going back to basics" even mean? People trade because they think they can make a profit or hedge their risk. That's all there is to it, nothing "more basic".

yep, 1% would be insane, I started trading actively for the first time on friday & I would certainly not be in the game with my money with a 1% trade punishment

Why not do it per transaction then per value of transaction. Individual transactions are around $5-$8 for non-day traders. So there is already a flat fee to buy or sell. It is very inefficient to issue a lot of small buy/sell orders. So this would discourage the high frequency of trading. Then there is an additional price based fee. The higher the value the higher the fee. The size of the individual share would make no difference then.

I totally agree with you. It would be better to charge a flat rate, perhaps 0.5%

Cuban's basic idea is good though. That said, the chances of Congress passing legislation that would limit Wall Street profits is very low. And, neither a democrat or republican president would sign such a bill if by some small chance Congress passed it.

Two problems:

1) Acquiring a company worth $100mm pre-tax?

- After tax, the cost just went up to $125mm.

2) Global competition

- Foreign exchanges would under-cut domestic exchanges, attracting many US based companies to list there and if the US attempted to tax foreign transactions by domestic persons, then foreign investors would end up with an unfair advantage.

The idea of disincentivising short-term investments is a good one. Changes to existing capital gains rules or a progressive per transaction tax may be more feasible though.

After tax, the cost just went up to $125mm

That's only assuming the company is trading at $1/share, which Cuban's proposal is saying should be taxed at $0.05/share, raising the cost to $105mm. The actual tax will be dependent on the valuation of the company divided by the number of shares there are. It's not a straight 25% tax across the board.

Thanks, this illustrates the first problem well, I was just pointing out the kind of impact Cuban's proposal could have on a valuation. Any tax implemented like this would still have a proportionate effect on returns.

Not sure that anyone is trying to make a case that we need less shares; rather, we need a system that incentivises a focus on fundamentals.

For all those people that consider this a good idea, have you ever really considered what high-frequency traders do for the market? High-frequency is a significant source of liquidity. Had high-frequency not been place during the financial crisis, the drops would have been much more significant than what we actually saw. Congress and the American public don't seem to understand this. If you pull the plug on high-frequency trading, you are pulling the plug on automated market makers, and the less market makers there are, the wider the spreads will be and the more volatile the markets will be. Now, I'm not saying that all high-frequency is market-making, but it surely a significant portion of it.

Here's an idea Mr. Cuban might like- a 99% tax on people who sell their companies, retroactive.

It's easy to suggest taxes that don't affect you personally.

I'm still confused as to exactly what problem he thinks he's solving here. That one-off weird glitch that happened for the first time in history yesterday and will probably never happen again? Or perhaps just sticking a few billion dollars extra into the gaping maw of the US Treasury?

And at what cost? Driving businesses out of the US? Severely lowering the attractiveness of listing a company on the US stock exchange? A billion other unforeseen consequences which neither I nor he is smart enough to see?

What about bonds, options, futures, etc.?

But anyway, it seems like the volatility that automated trading causes is the tax on the automatic traders. Anyone who bought, say, Accenture the day before this happened and sold it the next day just took losses similar to the wider market. (And the market is on a downtrend for good reasons, not "some computer program fucked up".)

Only the algorithms that were trading as it fell to zero lost money. It's unlikely a real person or long-term investor would have noticed it at all. So people that have their retirement savings in an S&P500 index fund have nothing to worry about, and the people that trade every millisecond have the same concerns as always.

What about a better idea - take away the tax incentive / mandated 401k contributions and allow "Main St." to stop being at the mercy of Wall St.

And how is removing an incentive to save for your own retirement (vs. relying on "social security") a good thing?

The madness of the market seems to stem from the tight feedback loop. Want to really make a difference? Pool it by hour. All calls have to be in by a millisecond before the hour, and after resolution no more transactions occur until the next hour. Now everyone has to cool off for a bit before making a trade based on changes to the market, and algo trading is relegated to stocks that don't matter. Any transaction worth making will have a human thinking about them for an hour, and it regulates the top speed of a crash.

"Every time markets crater, there is never a lack of liquidity."

To me this just reeks of misunderstanding of what happened last Thursday. The 20 minute nosedive was largely due to a lack of liquidity--bids just disappeared in most markets (hence trades that happened at 1c).

It will take the people on Wall St. about 2 days to stop trading 'shares' and start trading '1 millisecond options'. Firms like Goldman Sachs make money by skirting the laws and regulations. While the average investor would end up paying this tax.

This particular proposal isn't very well thought out, but plenty of other people have had similar ideas, going back at least to Keynes:

http://en.wikipedia.org/wiki/Financial_transaction_tax

http://news.google.com/news/search?q=%22financial+transactio...

You realize that, as much or as little sense as this makes, it's roughly what every voter wants to see happen?

Only the most ignorant. And even most of those could be talked out of it once somebody explained the downsides to them.

supposedly 2/3 of the market is from automatic trading applications - the ones that try to make a little money here and there. this would proposal would kill that portion of the market. at least market volume would represent something more meaningful than it does now.

Supposedly 2/3 of the packets on the network are sent from one server to another (e.g. webserver to DB) rather than from the server to the end user. Eliminating those packets would make network traffic represent something more meaningful than it does now.

Granted, your web server can't talk to the database anymore. But at least we've killed a portion of the internet which I don't understand, and which is mostly used by a bunch of geeks I don't like!

Here's a much better solution for stabilizing wall st. and our financial system: end fractional reserve banking. It's completely unnecessary for financial intermediaries to rely on the fractional reserve system to function and generate returns, look at venture capital firms and hedge funds. It is an unsustainable business model injecting a lot of the root fear into the market that is propped up by the federal subsidy of Deposit Insurance in order to function. FDIC is nothing more than a subsidy for banks to take on unnecessary risk and arbitrage the yield curve by making riskier loans.

There's a lot of shares worth less that $0.25 (edit: I missed the thing about smaller tax on low-price stocks on first reading...but IMHO that'd just feed pump & dump schemes). I'd prefer a small per-transaction tax which would cut into the margins of HF traders a bit. People object that that would reduce liquidity but the market does not and should not depend on speed trading. Frankly I'm not a fan of algorithmic trading strategies, I really feel that trades should be human-executed at all times.

eh, then Wall St. will just pass the extra expense on to Main St. in the end.

its a lose-lose solution

lose-lose-lose

Indeed. A high cost of investment means no more insurance, retirement funds, or loans.

Why tax 25 cents on a $80,000 stock (like whatever Berkshire-Hathaway is now), and 25 cents on a "penny dreadful"?

I understand the point of view - tax away high-frequency trading, but have we really thought things through? Obviously not.

FTA: "You could reduce the tax per share for stocks under $5 dollars to 5 cents. But I would leave it at 5 cents even for stocks priced at pennies per share or less."

Crazy. Imagine what this would do to any stock hovering around the $4.99 mark.

( This article located due to mention by ruang: http://news.ycombinator.com/item?id=1331269 )

This is actually one of the most reasonable proposals for fixing Wal Street that I have seen in a long time.

Tax Silicon Valley! And give it to those without factory jobs!!!! After all it was Silicon Valley innovation that allowed the robots to take our jobs!!!

edit: you laugh now...

Did you read the article? The proposal seems reasonable to me, much more so than your comment gives it credit for: a small per-share transaction fee which could be fed into "an annual payment towards the next time Wall Street screws up and we have a black swan event that no one planned on".

It's just an inflammatory, link-bait headline (which maybe I should edit).

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edit: I changed the title from its original, "Mark Cuban: Tax the hell out of Wall St. and give it to Main St.", to the current "Mark Cuban: place a 25 cent-per-share transaction fee on Wall St. trades"

Not only is the title link-bait. The plan is pure red meat. We all know that it's not just financial engineering responsible for the crisis. It wasn't just Wall Street. Wall Street just happens to be Washington's latest political scapegoat. What I'm saying is beware when their attention turns westward.

Adding a little bit of friction to vast, interconnected networks of automated high speed trades doesn't seem like the worst thing in the world to me. It seems like it might dampen otherwise wildly oscillatory behavior from the system.

Why do you feel that raising the bid/ask spread to $0.25 will prevent wildly oscillatory behavior?

If anything, it will probably increase strange behavior. If you want to buy shares, you'll either need to pay a largish premium or else you'll need to wait a while. Fun fact: for the most part, prices have stabilized and spreads have narrowed as HFT has entered the game.

If everyone, even the huge institutional players, has to deal with non-zero bid/ask spreads, it does reduce incentive to spend a lot of effort exploiting tiny arbitrage opportunities with huge-volume trades, which could stabilize things overall. Admittedly, it's something economists disagree on.

It also reduces the incentive to engage in market making. This makes it more difficult to buy/sell stocks when you want to, and generally makes all trading (even the long term speculation which Cuban favors) more difficult.

Arbitrage-exploiters do the worthwhile task of removing arbitrage. Putting arbitrage back into the market, visible to everybody but which everybody will sit on their hands until it becomes worth the 25 cent fee to exploit, seems like a way to create more instability.

It can add instability though, if the arbitrage-exploiting is too large a proportion of the market. If 95%+ of trades are trades based on statistical market patterns, which are themselves created by those same 95%+ of trades, you get weird feedback loops that have more to do with chaotic systems and attractors than with supply or demand.

Looking at prices of any given share for any day other than Thursday (was it Thursday?) would you say that such instability and big feedback loops are a big problem?

Yes it would mostly dampen, but in certain case the systems might go out of control. Since no one know what are the parts of the systems its very hard to predict.

Actually there is a share trading tax in India it is equal to 2 percentage points of the value that is 0.02% of the value this makes sure that if anyone is going to do HFT there margin is at least bigger than 0.02% Learn more here : http://www.smartmoneyindia.co.cc/2009/01/all-about-securitie... (not my link)

It might be better just to put the damn money in a trust to pay off the national debt. God knows everyone with the money to be trading on Wall St. is responsible for that debt.

Reply on news.ycombinator.com