Thursday, September 25, 2008


In an article today titled, “0.25% Trading Fee”, members of Congress are considering a 0.25% fee on all transactions. That’s a '%’ and not a ‘$’.

Here’s the article:

Why isn't this idea gaining more "traction"?

Rep. Peter DeFazio, D-Ore. [...] advocated a new government fee of .25 percent of every stock transaction to ensure that the government can recoup funds to pay for the aid that it provides to lenders. “If this is truly such a catastrophe, I don’t see how anybody can object to a one-quarter of one percent fee,” DeFazio said. Others who attended the session said that proposal seemed to be gaining little traction.

Wall Street (and their enablers in both parties) want the taxpayers to shoulder the entire cost. Heavens forbid if Wall Street itself have to shoulder any of the burden.

Now 0.25 percent might be too high. I don't know. How about a tax per transaction? It looks like normal volume at the Dow is about 4 billion daily transactions. Slap a penny surcharge on every one of those transactions, and we're talking $40 million raised, and that's not including the NASDAQ and other markets (the Chicago exchanges, etc.). Over the course of the year, that would approach $10 billion. Hmmm.

Let's make that surcharge $0.25. That would be $1 billion raised per day, or about $240 billion raised in a year. That sounds better.

And yeah, it would suck for Wall Street, since that's real money out of their pockets, but they created the mess. They should be the ones paying to clean it up. Better the money come out of their pockets than ours.


As a trader, there are several problems I see with this:

· Individual scalpers and day traders will get hit the most within the retail category. These types of traders depend on the ability to trade rapidly to turn a profit, incurring significant transactions as well as shoulder the high burden of commissions. The addition of 0.25% per transaction will likely lead to a major shift in strategy among these traders.

· Institutions, particularly hedge funds, will obviously object to this proposal. Hedge funds account for more than 25% of the daily volume on the exchanges. This could amount to the hundreds of billions of dollars in fees by year’s end. Hedge funds that practice daily rapid-trading will likely shift their strategies.

· How are market-makers and specialists affected by this?

· Brokers will see reduced commission revenue and may need to raise commission rates or otherwise suffer.

· Why in the world would we help the government pay for something they failed to regulate in the first place?

Sure, we can help the government pay for the mess, but Isaac Newton would have said “for every action, there is a reaction”. This proposal will most likely reduce trading activity immediately and create havoc in a market that’s already in disarray. The market is already experiencing reduced liquidity due to the temporary short-selling ban; however, government action like this will kill liquidity and the confidence and support of traders and investors worldwide. I for one say NO.


Anonymous said...

I was looking at COH's chart and it seems like every time it touches the $24.xx area it gets a bounce. Nancy pelosi might suggest another stimulus package for the economy. I was wondering would this be a good momentum play. THANKS!

John C. Lee said...

Sure, but I would wait until COH successfully tests the $24 area. That's the low-risk entry with minimal risk.

The high risk entry is to get as close to $24 as possible. Obviously, the risk is that support could break, leaving you with a loss.

My trading style dictates that I get in on the confirmation day, just to minimize risk. It's your call.

Anonymous said...

Thanks for your reply! Hey I made some comment on your FINL post 9/24. They just reported better than expected earnings. stock rise AH. By the way, it seems like the congress won't reach any deal today! Good day to short? Any game plan? ( RIMM would me my short candidate, good earnings but miss street plus lower profit margin, scared investor. If we are going to plunge tomorrow, I guess it's a good day to short the stock to low $70. Love to hear from you

John C. Lee said...

futures are down a bit over 1% on th bailout deal breakdown as well as the WM failure. The market will open lower, which is the reason why I wouldn't buy FINL at the open in any case. The first 30 minutes are the most erratic of the trading day.

If the market starts to fill the gap within 15-20 mins, then I'm buying for a day trade until the day breaks down (if it does). In my "today's Action" post, I noted a major support levels which the SPX may hit.

We'll just have to see what happens.

Anonymous said...

So, if the SPX start to move towards the support level after 15-20 of trading, then is a sign to buy for a day trade? otherwise go short?

John C. Lee said...

yea, hurry up! Any large 100+ pt gap downs, is a buy in the first signs of today!

Anonymous said...

You are my new GOD! Bullseye!!