Why is a trading tax, a bad thing?
Congress wants to bring a new tax on trading. For every $5000 you trade, government wants to take $12.50. Well that doesn’t sound bad for long term investors, right? No. Taxing trade can significantly impact the market efficiency. Take a look at chart 1 that has transaction costs (in basis points) for a few economies.
Chart 1
Data source: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp322.pdf
Well, Venezuela, Thailand and Turkey have more transaction costs, so they must be great markets, right?
Venezuela produced a real returns of –2.04 between 1937 and 1996, compared with over +5% returns in US markets.
You think this is a bad thing for traders, but you are a long term trader, so why should you bother? Chart 2 is the returns for an efficient portfolio with annual and semi-annual rebalancing. In Latin America and Asia, the transaction costs can reduce the returns substantially compared to US. Long-term investors watch out!!!
Chart 2 – Return on efficient portfolio with transaction costs
Source: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp322.pdf
What were traders paying before 1975?
Btw.. this was the minimum commission schedule before 1975. People routinely paid $100+ for pretty small transactions. This crippled the entire market and wall Street. Sadly, we are looking at the same direction.
http://www.lesechos.fr/medias/2008/0915/300292512.pdf
Here is an interview with the security trader’s association:
