Some politicians, Kamala Harris and Bernie Sanders, have recently floated the idea of a 0.2% transaction tax on stock trades.
Politics aside, if it were to be implemented, how would it impact your current strategy?
I’d fold up shop
Ditto.
It would not be just the overall drag on the returns. The drawdowns would be magnified.
Many would fold up shop—even if they did not plan to initially.
-Jim
Why close shop? For the universe that I work with (approx Russell 3000), the median 5-day ATRN is about 3%. Wouldn’t a 0.20% tax be just a fraction of the normal price volatility?
You would not taxed be taxed on the volatility of the market. I do not see how ATRN is related to how I would do with a new tax.
Pretty sure my accountant (or my broker if it comes straight out of my account) won’t be asking about the ATRN, anyway.
-Jim
Not a tax on volatility. I was offering that there’s a daily price uncertainty (volatility) that is several times large than the 0.02% tax. Say, if one were to buy IBM and it’s price range on that day is 2% to 3%, then the extra drag of 0.02% doesn’t look like a big deal. Now that I think about it, since, on average, the transaction price would be somewhat in the middle of that range, the tax becomes a more significant drag. I suppose another way to look at the tax is as an adder to slippage. Would that added slippage kill a model?
So I’m going to change my story. 
For a model with an average return is 5% or more, then the 0.02% is small beans. I’m unsure how small the average return needs to be to cause some real pain. So maybe comparing the tax rate against the models’s expected return per transaction is a better determinant of whether one should stay or leave.
Walter
EDIT: Changing my story again. If the tax is one the entire transaction amount (i.e. not on profits), then maybe the added slippage model is the way to look at it.
I think that is a good way to look at it too. Could be added into the commission (% of total) for fun in a model. Just to see.
Just did. Yeah, I don’t like it. Guess the model with 0.2% entered counts it both ways: in and out of the trade.
It did not have as much effect on the drawdowns as I thought it would. Perhaps, 0.2% is small potatoes on those big down days (e.g., 2008). So there is that:-)
-Jim
delete
If the tax dried up daily trading volume and liquidity, which seems to be one of the expressed intents of the proposals, it would have a huge effect on bid/ask deltas … particularly in smaller caps
I would focus on trading in Canada
As for the original question; my strategy would remain unchanged.
I calculated if your average holding period is 90 days, then it’s about an extra 2% drag on returns. Seems like you gotta be quite sure of your alpha to do this.
If 0.2% tax occurs for both buying and selling, then it can be added to slippage or commissions in models. If it only ends up applied to sales, like the regulatory and trading fees I get charged for separately from the commission fee, then cut the tax in half, 0.1% or whatever it might become, so that round-trip the proper amount is applied in models.
I assume the annual turnover rate as a multiple of 100% times the tax rate is a decent gauge of how much it would likely impact overall return and alpha. *** So, if a model has 300% turnover it might lose 3 * 0.2% = 0.6% annually.***(see edit note below) If this is a valid way of considering the impact (thoughts anyone?) then higher turnover models will suffer proportionally more. I try to stay below 300% now so the direct impact would not change my approach or market participation. It would make me even less likely to try high turnover models and more likely to minimize turnover. It could impact high turnover designer model participation somewhat.
Indirect effects, like less high frequency trading leading to less overall market turnover, adjusted actions by market makers, maybe slightly bigger spreads and such, could sometimes cause pain and other times maybe some benefits. I’m not feeling threatened. Brokers might even try reducing commissions to keep volume up, effectively absorbing some of the cost. There’s no black and white answer here, I think. Lots of gray!
*** Edit: Average annual turnover only considers purchases or sales, not both. So if the tax is applied to both purchases and sales, the impact should be about 2 * Turnover / 100 * 0.2%, or for the example of 300% turnover, 1.2% rather than 0.6%.
Boon for futures?
From Wikipedia: “When purchased, no transmission of share rights or dividends occurs.” So, no tax on futures I think. There are already a lot of people investing in E-minis to avoid slippage. But there are futures for individual stocks and presumably the use of futures could be increased.
If not futures then some other Wall Street invention. Remember derivatives were big enough to almost bring down our whole economy. Maybe a new “derivative.” BTW, could you buy a derivative?
I guess this is getting a little political but I think the tax will not happen without some support from some faction of Wall Street. I think it is certain that some of the candidates are receiving campaign contributions from Wall Street. But perhaps Elizabeth Warren more than Bernie Sanders, for example.
Of course, this would apply to any party. So not a lot of political intent toward a particular party in my post.
We saw with Nickel Spreads that market makers benefitted.
This is not limited to Wall Street. Clearly, with the affordable care act PHARMACY COMPANIES BENEFITTED BIG-TIME. You may have to trust me: the pharmacies, through the formularies, and the insurance companies control have unbelievable control now. The EpiPen is a public example of what goes on every day with EVERY PATIENT now.
Most people hired to be in an administration have certain biases and interests. As an example, Larry Summers per Wikipedia: “Former director of the National Economic Council for President Obama.” But also:"On October 19, 2006, Summers was hired as a part-time managing director of the New York-based hedge fund D. E. Shaw & Co. for which he received $5 million in salary and other compensation over a 16-month period. Would Larry Summers be in favor of something that would end D. E. Shaw & Co.?
Worry, but if it happens there will be ways around it and some will benefit. At least D. E. Shaw & Co. will be able to stay in business, I am sure. The question will be: can we get around it and will P123 stay in business? Maybe not. For example, probably no futures contracts for my SEP-IRA.
I am not too worried for the short run. Not with Biden, Trump or Elizabeth Warren anyway.
-Jim