[1] https://en.wikipedia.org/wiki/European_Union_financial_trans...
The devil is in the details, but at first glance that looks like an absolute disaster in terms of stock trading. For example, if a mutual fund bought a stock twice in a year, and then sold that stock twice in a year, that's 0.4% being gifted to the government right there? From just that mutual fund. And another 0.4% from whoever is on the other side? Wow!
Am I reading that right?
Also it says "financial institutions" but looks like it will also apply to individuals. The Wiki page says "If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client."
I think that could dry up trading volumes by about 95% in the affected countries. For example, when I sell stock now, a market maker takes the other side. But he won't want to if he has to pay 0.1% for the privilege. So now I can't sell a stock to an intermediary? I need to wait for another investor or a mutual fund to take the other side of my trade?
What am I missing? That can't be right?
Edit: one immediate thing that sticks out is that "derivatives" will be created to replace stocks, since the tax savings is about 90% by doing that. For example, let's say a stock costs $10.00. Why not create an "American style" call option on that stock, strike price $0.01, expiration date 2099. The value of that option is $9.99. But the tax rate is 0.01% on the derivative, vs 0.1% on the stock itself. Someone hasn't thought things through here.
Market makers will take the other side of that trade, they will just price the tax into what they are offering you, so you will pay both ends of it.
I think the idea is that such moves contribute to the instability of the market as a whole, and hence should pay a small penalty for it.
> I think that could dry up trading volumes by about 95% in the affected countries.
Yes, it is not entirely clear that large trading volumes contribute anything positive to the economy as a whole. There are real people somewhere in the picture who are trying to buy/sell shares in regular and are getting shafted in terms of either buying price or trading fees by high-frequency bots. The tax should even out things a little bit for the average person.
What's tiny about 0.1%? The amount of money that would suddenly be leaking out of a big mutual fund when it rebalances or reconciles at the end of the day could end up being huge.
The amount of buying and selling something like a Vanguard index fund has to do to track its index with precision is probably pretty impressive, but it's not the kind of weird HFT which annoys people. Introducing inefficiencies into that process is something I cannot believe EU regulators really intended... did they?
Everyday investors lose, the taxman wins, and to what end? It just seems kind of stupid.
Charge an extra 0.1% when someone deposits and 0.1% when they withdraw, and that means 0.2% covers the entire cost.
You should also consider that rebalancing happens more frequently than when shares are created or redeemed. Suppose a fund has a mandate to track the S&P 500. If a symbol is replaced by another in the index, the fund will need to alter its holdings, incurring transaction fees.
As for the second point, how is that any different from rebalancing? Money added to the fund is used to buy the new shares. Money withdrawn from the fund is marked against sales of the old shares, no?
It is rebalancing, but you seemed to state that rebalancing only occurs at creation and redemption. In the case of SPY, the holdings will change every time the underlying index changes, which has happened 20 times in 2015. Each change in holdings requires, at a minimum, 2 transactions, and involves 40 tax payments as a consequence.
I actually stated the opposite on rebalancing - that it happens continually - so I'm not sure where the confusion lies. Money is continually entering the fund and continually leaving the fund. Perhaps using some numbers will make it clearer what I mean. Lets say you decide to invest $20 in the fund. And I decide I need my $20 so I withdraw it from the fund. And the fund happens to need to sell MSFT to buy RHT today to rebalance. So it sells MSFT for $20, which you get $19.98 of (minus your tax), and I invest $20 which they use to buy RHT of which I get $19.98 (minus my tax).
Mind you, I don't actually know how this tax is applied for a fund. Is it applied to the fund purchasing shares, or to my deposit in the fund, or to both?! Maybe it's like VAT and it just gets passed down to the final buyer?
Anyway, I'm generally a fan of financial transaction tax. I think it should replace all other taxes. The major benefit being that it can't be avoided by the most wealthy or by corporations, like most other taxes can.
You appear to be confusing creation/redemption with rebalancing. Creation/Redemption occurs at end of day when people enter and exit the fund. In the trivial example, suppose you're paying for a full unit of the fund (so 1 share of MSFT, 1 share of RHT, etc.) Then the fund manager will need to go and purchase 1 share of everything for you. Now there is also rebalancing, where the index being tracked changes. Suppose we have SPY. There were 20 instances throughout 2015 where the symbols in the S&P 500 were changed. Even if no one created or redeemed SPY, the fund manager would be subject to 40 transaction taxes simply to track the index (sell the old shares being replaced and buy the new one in the index).
SPY, for the record, has an expense ratio of 0.09%. How can State Street afford to manage the ETF for you in the face of this tax? Well to start, you will pay higher fees, which will lower your returns.
I also looked into the details of the tax [1]. It has horrifying economic ramifications:
* Up to 90% reduction in derivative transactions -- Markets are meant to move capital to people and firms who need it and risk from those who don't want it to those who want it. Derivatives are exceptionally important and reducing their use is a bad thing. For example, Apple needs to buy phones in one currency (Yuan) and sell them in another (USD). They face exchange rate risk, as the value of the two currencies fluctuate relative to one another. Apple can enter into a derivative to exchange their potential upside if the exchange rate fluctuates in its favor for a guaranteed exchange rate. Without these contracts, global commerce would be severely restricted.
* A long-run (20-year) reduction in gross domestic product -- this reduces levels of consumption across society, reducing tax income from other sectors and reducing employment, increasing the demand for government services. In other words, you are reducing the ability for the government to pay for services that it now will need to provide more of.
* An effective curb on automated high-frequency trading -- Why is this a good thing? HFT ensures greater liquidity in the market and simultaneously ensures that the prices of assets more accurately reflect their true value.
* An increase in capital costs, which could be mitigated by excluding primary markets for bonds and shares from the tax -- Increasing capital costs reduces economic growth, job opportunity, and R&D. The mitigation proposed is not as effective as one might think, as any purchaser in the primary market understands that the asset is less desirable in the secondary market to a purchaser as a result of the transaction tax there.
This tax is bad economic policy and will hurt everyone in the long run. However, it is a popular sentiment to want to punish financial institutions because they were bailed out. However, it's less popular to acknowledge that the government has made a substantial profit on those bailouts [2].
[1] https://en.wikipedia.org/wiki/European_Union_financial_trans...
The notion that long-term investors in anything should be punished so severely on the front end (if you understood compound interest you would know that losing 0.1% right away is a bigger hit to the long-term investor than it at first appears, which is why basis points matter a lot when a long-term investor is weighing the cost of a mutual fund or taking into account brokerage fees) as part of a tax designed to penalize HFT and derivatives trading is just completely strange. It's an indicator that the people who created the law don't know what they're doing or have (really dumb) ulterior motives.
With an FTT, that 'tiny' tax is charged indiscriminately all the way through the chain. And passed through the chain to the end consumer. So the market maker pays it twice (in and out of a position) and their margins are razor thin. So spreads will increase by twice the tax for starters. Plus you as end consumer will pay it twice (on buying and selling). So at a bare minimum that 0.1% will be 0.4% for an end consumer. More if more middlemen are involved in the chain, since it just compounds. What are annual returns? 4-8%? So we're talking about the government taking 5-10% of your profits? Does it seem tiny still?