Taxing manipulators

stock exchange by BlatantNews.com
Tax the Hell Out of Wall Street and Give it to Main Street
[Via Blog Maverick]

Today was a brutal day on Wall Street. Through no fault of investors.

Today was brutal because of traders and financial engineers who trade on every piece of data . Those that work from quantitative formulas that drive trades based on data input. Not a single one of them acts like a shareholder. And that is the reality of the stock market.

The market is no longer driven by shareholders. The market is driven by formulas that drive trades.

So what should the government do ?

Tax every single share of stock that is bought and sold 25 cents per transaction. One quarter. If you buy a share of stock, your brokerage pays a 25c tax. If you sell a share, your brokerage pays a 25c tax. 1 share, 100 million shares. Its 25 cents per share.

Of course the tax will be paid for by those of us who are buying and selling stocks. So what? Here is the reality. If you are a true investor. Someone who wants to own a share of stock in a company you believe in, then its an amount that is not going to impact your investment decision making process. You bought those shares to be a shareholder.

If you dont think the company you are buying is worth at least a quarter more than what you are paying , why are you buying shares ?

[More]

If the rumors are true. there was a huge drop in the market yesterday because a trader hit the wrong key. Some stocks lost over 90% of their value during this apparently accidental but possibly manipulative event.

Here is pure speculation regarding how someone could make a large amount of money in this confusion. I wonder if it was possible.

Anyone can set up buy orders at a set price. These get automatically tripped when that price is reached,

So, during this ‘manipulative event’, the prices of many stocks dropped over 90%. You could have completed a buy order for 10 cents. Then when things got back to normal, you could have sold those shares for $40 or more a share. (Using Accenture as an example.)

Of course, the exchanges look for things like this and canceled a lot of orders. But, they have to pick some limit because they do not want to cancel all orders. So the NASDAQ set a level of 60%. Buy orders that were 60% below the price at 2:30 PMwill be canceled.

But that also means that anyone who was within 60% of the price will get to complete the transaction.

Nasdaq’s cancellation threshold of 60 percent meant that trades in Cincinnati-based Procter & Gamble Co., which fell as much as 37 percent for the biggest intraday drop in the Dow industrials, would stand. The world’s largest consumer products company said stock trades that pushed its shares down were probably an error.

So, if someone happened to know that a ‘mistake’ might be made, they could put in buy orders for AAPL for 220, which was at 247 at 2:30. Since it dropped to 216 at 2:44, those trades would have gone through.

That someone could have sold those shares later in the day for 245 or higher. $25 per share. 10% profit for a few hours of holding.

I would hope that the SEC is looking into this really carefully. Sure this might have been an accident this time but it sure indicates the possibility of manipulating the system. The cheats could have moved their ill-gotten gains and themselves to a nice tax haven by the time their malfeasance was found. How tempting would making millions on a typo really be?

Perhaps if there was a tax like this, the trading organizations would be a little more careful in their oversight during these sorts of events. Maybe there would not be the need for so many billions of shares to be traded by manipulators.

Possibly not. But it would be a start.

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