Clinton Aims Party’s ‘Wall Street’ Tax at Flash Boys, Not Banks

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Democratic presidential candidate Hillary Clinton waves on July 12, 2016, in New York City.

Photographer: Yana Paskova/Getty Images
  • Presumptive Democratic nominee wants tax on canceled orders
  • Party platform expresses support for financial-transaction tax

The Democratic Party’s proposed 2016 platform supports “a financial transaction tax on Wall Street” -- but presumptive nominee Hillary Clinton is focused on a narrower approach that isn’t likely to target big banks.

Clinton and her advisers propose taxing some high-frequency traders who spam markets with thousands of orders they later cancel. That levy would affect a comparatively small number of firms -- none of them household names -- and Clinton isn’t likely to expand it into a tax on all trades of stocks, bonds and derivatives, according to senior policy analysts familiar with her campaign.

Clinton and Sanders on July 12.
Clinton and Sanders on July 12.
Photographer: Ian Thomas Jansen-Lonquist/Bloomberg

“Those of us who’ve advocated for a tax on financial transactions have something much more encompassing in mind than a tax on canceled orders,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, who said he’s in touch with Clinton’s campaign on the issue. “You can argue that this is a very narrow version.”

The difference in approaches highlights Clinton’s complicated relationship with Wall Street. Her campaign has weathered criticism over millions of dollars in speaking fees she accepted from big banks and other interests after stepping down as secretary of state in 2013. At the same time, she has called for imposing a “risk fee” on the largest financial institutions, for toughening rules against big banks engaging in speculative trading and for other measures aimed at strengthening bank regulation.

Platform ‘Diversity’

While party platforms are mostly symbolic, and have no formal hold over a candidate, the Democrats’ emerged after a lengthy discussion aimed at promoting unity among supporters of Clinton and those of Vermont Senator Bernie Sanders, who had challenged her for the nomination. Sanders endorsed Clinton on Tuesday.

The platform, finalized last weekend in Orlando, Florida, specifically endorses “a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets.” It also says: “We acknowledge that there is room within our party for a diversity of views on a broader financial transactions tax.”

That language constitutes a nod to Sanders, who had proposed a broader tax on financial transactions. Similar to taxes in France and Italy, his proposal would have assessed a 0.5 percent rate on stock trades, 0.1 percent on bond trades and 0.005 percent on derivatives trades.

‘Manipulative Behavior’

“We got this language about a ‘financial transactions tax’ in the Democratic platform for the first time in history,” said Warren Gunnels, the top policy adviser to Sanders’s campaign. Sanders supporters will continue a “grassroots movement” to support his proposal, Gunnels said.

“But does this mean that a financial transactions tax is going to happen? No it doesn’t,” he said.

Clinton’s proposed tax on canceled orders “is designed to address some of the concerns that she’s had and many other observers have had, about markets flooded by high-frequency traders -- about the manipulative behavior profiled in books you’re aware of,” said Gary Gensler, a senior Clinton campaign adviser.

Gensler, who served as chairman of the Commodity Futures Trading Commission from 2009 through 2013, was referring to “Flash Boys,” Michael Lewis’s 2014 best-selling book, which portrayed some of the speediest traders as using computers to rig the market. Some academic research has blamed such traders for submitting high volumes of canceled orders, creating false impressions of demand.

Market Concern

High-frequency traders typically work at obscure firms outside the main cluster of big banks that dominate Wall Street, and they work through automated markets spread out across New Jersey and Chicago. They gained attention after the so-called “Flash Crash” of 2010 wiped $800 billion from the value of U.S. stocks in a few minutes, amid concern that their computer-driven strategies fueled market instability.

Proponents of high-speed trading, which is carried out through sophisticated algorithms, argue that it promotes liquidity in markets. High-frequency trading firms accounted for about half the trading volume in U.S. stocks in 2015, according to the Tabb Group, a market research and consulting firm.

Costs Down

“High-frequency traders provide a lot more liquidity than we used to have, and they’ve driven down trading costs,” said Lawrence Harris, a finance professor at the Marshall School of Business at the University of Southern California. Harris was the chief economist of the Securities and Exchange Commission from 2002 to 2004.

Some large hedge funds use high-frequency-trading algorithms, and some big banks use algorithms of various types -- albeit sparingly under restrictions on their ability to do speculative trades. Harris said it follows that a tax on canceled orders would primarily hit specialized high-frequency trading firms, not Wall Street banks. “It just plays into people’s fears of computers,” he said, adding that he opposes such a tax.

Clinton’s tax on canceled orders remains little more than a talking point for now. Her campaign has yet to provide detail on how it would be applied or collected. Michael Schmidt, a Clinton campaign economist, said the goal is “to level the playing field so that the investing public gets a fair shake and fair access to the market.”

Democrat’s Bill

It’s unclear how much her proposed tax would raise. “It’s much more designed to address a particular market distortion than raise revenue,” said Bernstein, of the CBPP.

A broader proposal from a House Democrat to tax financial transactions, due to be unveiled Wednesday, would raise as much as $417 billion over a decade, according to a news release from Representative Peter DeFazio of Oregon. DeFazio proposes to levy a 0.03 percent tax rate “on most financial trades,” according to the release. The proposal largely mirrors a bill DeFazio introduced in 2009 that never came up for a vote in the tax-writing House Ways and Means Committee.

Clinton campaign spokesman Tyrone Gayle declined to comment on DeFazio’s planned legislation. “To my knowledge, Representative DeFazio and Secretary Clinton haven’t discussed this bill,” said Beth Schoenbach, a spokeswoman for the congressman.

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