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Understanding Hillary Clinton's New HFT Tax

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Understanding Hillary Clinton's New HFT Tax

hillary4In order to keep pace on the scoreboard with the other candidates on the Democrats' side of the presidential race, Hillary Rodham Clinton has publicly announced her new "fix" for Wall Street. Forget for the moment that, despite the appearance of strong sentiment against Wall St (and the wealthy classes generally) in the Democratic Party, Hillary actually remains the most pro-big-dirty-money candidate in the entire race.

Nonetheless, in response to similar calls for reform in the financial markets from other Democratic contenders like the Vermont Independent (and unabashed Socialist) Bernie Sanders and Maryland's Martin O'Malley, Mrs. Clinton has been forced to join the lefty bandwagon of bashing big money. What are the potential implications of her newest proposal?

Going After Spoofers

In addition to "beefing up" aspects of the Glass-Steagal and Dodd-Frank legislation that attempts to punish financial institutions (especially individual employees) for behaving in an overly risky manner with taxpayer money, Hillary took aim at high-frequency trading (HFT) methods. These fast-paced, computerized trading methods are a concern because they allow unscrupulous traders to rapidly place and then cancel orders. This gives them a snapshot of how the market might react to such trades, and then they can plan accordingly. This tactic is known as "spoofing."

hillary2Lending credence to the idea that spoofing is even a widespread problem is the proportion of real trades to cancelled trades. On the New York Stock Exchange (NYSE), only 1 of every 21 trades is actually executed. That's only around 4%; the rest of the transactions are merely cancelled.

The ratio is even worse for ETFs: 80 orders or trades are cancelled for every successful transaction.

To try and address this problem, Mrs. Clinton has proposed imposing a transaction tax on such trades, believing this measure would cut down on the number of cancelled orders the HFT crowd is willing to pay for. The logic follows that, since high-frequency trading tactics are undoubtedly here to stay, such tactics should at least come with some penalty or extra cost.

Goldilocks Problem

While there are certainly pundits on both sides of the political aisle who have been calling for such regulations, it is decidedly a pet issue of the Democrats. Yet, even within Clinton's own party, the proposal seems to please no one. Naturally, her opponents in the presidential race are claiming it doesn't go far enough. Meanwhile, other more moderate Democrats believe the proposal is too aggressive, and will stifle economic growth.

The chances remain good, however, that the topic of greater regulation of the financial markets will be a key topic of discussion at the first Democratic Party debate scheduled for Tuesday, October 13th.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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