Call it the “Robin Hood” tax plan…
That’s because the left’s latest wealth-redistribution proposal will take from the rich and give to the poor—or at least, that’s what it claims.
This newest “feel-good” bill—introduced by Democratic Senator Brian Schatz of Hawaii—would place a 0.1% tax on all stock trades. Now, Schatz’s main target is high-frequency trading (HFT), which uses computers to buy and sell equities in fractions of a second.
Here’s Schatz:
Roughly half of the 8 billion daily trades now are high-frequency trades, and that is increasing volatility in the market; it is allowing a certain category of traders to essentially skim profit off the top. And on a more basic level, it is turning the stock market into a true casino…
To us, this sounds like another political sound bite that isn’t backed up by facts. And it’s just the latest in a series of initiatives by the left to fleece the markets.
Last month, Senators Bernie Sanders and Chuck Schumer announced legislation to restrict share buybacks. And Senator Elizabeth Warren wants to levy a wealth tax on Americans with fortunes over $50 million.
While these plans are well-intentioned… as I’ve written before, they won’t solve wealth inequality.
In fact, if passed, they would limit the number of money-making opportunities we can find in the market. And if you’re banking on a comfortable and dignified retirement, that means less money in your nest egg.
So I reached out to our Wall Street insider, Jason Bodner—to see what effect a tax on HFT would have. But before we get to that…
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How HFT Works
As I mentioned, HFT uses computer algorithms and executes trades in milliseconds. It exploits slight changes in stock prices, so the gains are usually small (fractions of a penny)… But there are millions of these trades per day, so they can quickly add up over time if successful.
And Bloomberg has estimated that nearly 70% of U.S. trades involved some type of high-frequency trading at its height in 2010. That’s about 3.5 billion shares per day, although the number has declined some since then.
Schatz says a tax on HFT would raise $800 billion for the federal government over a decade. More importantly, he says it would reduce speculation and bad behavior in the market.
But here’s what “do-gooders” like Schatz are missing: HFT provides an important service that—if removed—could hurt not only big hedge funds, but everyday investors, too.
It all has to do with liquidity…
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Bringing Liquidity to the Market
Think of liquidity like jumping off a diving board into a pool. You want the water in the pool to be deep enough to keep you from hitting the bottom. If it’s too shallow… well, you get the picture.
The same applies to the market. If stocks drop, a “deep pool” of liquidity will slow down their descent. But when liquidity “dries up,” stocks can plummet with no buyers.
Now, when it comes to HFT, there aren’t many people who know more about it than our very own Jason Bodner, editor of Palm Beach Trader.
Regular readers know he spent nearly two decades as a top trader for prestigious firms like Cantor Fitzgerald. And his proprietary system scans nearly 5,500 U.S. stocks every day, looking for the best of the best that big institutions are buying up.
So I asked Jason for his take on the proposed legislation:
Look, Democrats can’t even get the documents they need to investigate President Trump. So passing a Robin Hood-type tax will be difficult.
Schatz and other Democrats are saying that fat cats are making themselves richer, and we should penalize them. But what they’re really trying to do is get a pulse on their base. They have to find issues that can electrify their support.
And Wall Street is a popular whipping boy. It’s easy to demonize it because you can personify traders as money-grubbing evil-doers.
And Jason said that even if the legislation does pass, it would likely do little to stop HFT…
Even if you had a 0.1% HFT tax, traders will still get to keep 99.9% of their profits. So it’s hard to tell how many trading strategies would be affected by this potential change.
And high-frequency traders are among the smartest people in the world. There’s a good chance they’ll find a way around it. Or at the very least, they’d pass the costs on to their clients.
I’m a free-market proponent. The more we limit markets and impose restrictions, the worse it will be for everyone. HFT isn’t going away, and computers are here to stay. Wall Street will just remap how it trades. So I don’t think it’ll go anywhere.
We don’t think so, either. But what if it does?
In that case, Jason says a bill like that could dry up liquidity in the market. And the evidence backs him up…
France enacted a similar tax on trades in 2012. And according to a 2017 European Central Bank report, it lowered trading volumes and reduced market liquidity.
When you have fewer trades, it’s harder to buy and sell stocks. This makes markets operate less efficiently. And inefficient markets hurt everyone—translating into less-productive investments.
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Be Prepared
A tax on HFT will reduce liquidity—making the market a lot more volatile. If that happens, investors will have less confidence… and some will panic-sell their otherwise profitable positions.
Again, we don’t think Schatz’s bill will pass anytime soon—if ever. But if you still want to take precautions, use risk-management strategies like position-sizing and stop losses.
Position-sizing and stop losses take the emotion out of investing. That’s because they cap your downside, while allowing your profitable positions to run higher.
You’ll sleep better at night, whether the left passes its Robin Hood tax plan or not.
Regards,
Nick Rokke
Analyst, The Palm Beach Daily
P.S. As I mentioned above, Jason has spent nearly two decades working inside the belly of Wall Street, placing trades for the richest institutions in the world. Not only did he become one of the best traders in the business, he also came across a little-known loophole that can help ordinary investors make triple-digit gains like the big boys.
The loophole involves a 10-day window in which companies must disclose when they’ve bought a large block of stock. Jason calls these “13-X” trades. And they’ve shown historical gains like 209%, 382%, and 352%…
You can learn how Jason’s $250,000 system flags these big-money trades right here.
Meanwhile, do you think France’s warning signal will prevent this Robin Hood bill from passing? Or will the left be successful with its feel-good proposal? Let us know your take right here.
MAILBAG
From Paul S.: Hi Nick, great article on position-sizing. Now, I know the strategy big investors use to exit trades without taking catastrophic losses. But I also want to know when these top investors exit their trades for big profits. Can you help?
Thanks for all the work you do.
Nick’s Reply: Thanks, Paul… We can’t give individualized financial advice. But there are several ways to handle a winning position. Some investors take profits off the table as their position rises. Some won’t sell until the trend pushing the position higher changes. And others use a trailing stop. The important thing is to have an investment plan and stick to it.
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