Democrats Back a Trading Tax, Say Speediest Traders a Threat

  • Clinton, Sanders both suggested levies on Wall Street
  • Exchanges and trading firms argue taxes would harm markets

Democrats drafting their party’s platform proposed taxing trades on U.S. exchanges and called the speediest traders a threat, stepping into two of the most contentious areas of modern markets.

“We support a financial transactions tax on Wall Street to curb excessive speculation and high-frequency trading, which has threatened financial markets,” according to a draft released Friday of the proposed Democratic platform, a summary of goals the party wants to promote. “We acknowledge that there is room within our party for a diversity of views on a broader financial transactions tax.”

The proposal is a nod to the agenda of Democratic presidential candidate Bernie Sanders, and an effort to appeal to his supporters. The draft platform’s reference to “a broader financial transactions tax” echoes a proposal from the Vermont senator, who challenged Hillary Clinton for the party’s nomination but who now says he’ll vote for her.

The full Democratic Platform Committee will meet July 8-9 to vote on approving the platform, which would then be up for debate and adoption at the party’s convention later this month. The proposal didn’t specify the size of the tax or exactly what would be taxed.

Exchanges and electronic traders argue financial transaction taxes would sap liquidity from markets because they would wipe out the already razor-thin profit margins on trading. A proposed trading tax in Europe appears doomed because of such concerns. Terry Duffy, the executive chairman of Chicago-based market operator CME Group Inc., recently called a plan to tax trades in Illinois “ridiculous.”

‘Abusive Trading’

Clinton, the presumptive Democratic nominee for president, has also targeted high-frequency traders, saying they have “unnecessarily placed stress on our markets, created instability, and enabled unfair and abusive trading strategies,” according to her website.

Sanders has proposed taxes on all trades -- imposing a rate of 0.5 percent for stocks, 0.1 percent for bonds and 0.005 percent for derivatives. The tax would be imposed on “Wall Street investment houses, hedge funds and other speculators,” according to Sanders’s campaign website. “If those Wall Street investment houses chose to pass the tax along to investors, this plan would provide a tax credit to individuals making under $50,000 and couples making under $75,000 to ensure that they would not be impacted.”

‘Flash Boys’

The draft also called out high-frequency trading firms, or automated market makers that use computer-driven strategies in essentially every major asset class. They’re viewed by exchanges as a vital source of liquidity. But critics, notably Michael Lewis in “Flash Boys,” accuse them of taking advantage of slower investors.

That’s a conclusion the trading firms reject. “We hope that responsible leaders will examine the empirical evidence about how HFT has transformed our markets and saved investors money before making unfounded allegations,” said Bill Harts, chief executive officer of the Modern Markets Initiative, an HFT advocacy group. “Our nation has the best markets ever, the envy of the world, and we don’t understand why any politician would want to destroy that.”

Trading volumes could shrink by at least 50 percent, cutting exchanges’ revenues by three-quarter or more, he said.

    Before it's here, it's on the Bloomberg Terminal.