Financial transaction tax needed to reduce volatility, increase investor confidence
Michael Kramer’s most recent Sustainable Investor column on GreenBiz.com addresses the continuing risks to the financial system that are introduced by computerized high-frequency trading, which accumulates profits by buying and selling stocks multiple times per second. You may recall the “flash crash” of 2010, when computers drove a quick 1000-point drop in the Dow Jones average. Kramer notes, “the problem with this approach is that a company’s fundamental financial value is completely overlooked by this type of investor.”
An existing transaction tax of .00257% raises about $1 billion per year to fund the SEC; other major economies, including the UK, Hong Kong, Switzerland, and India also impose FTTs on at least some asset classes. Kramer makes the case for raising the FTT enough to discourage some of most egregious high-frequency trading. The simple truth is that investors need to trust the markets if they’re going to invest in them again. As long as people are afraid that the system has run amok, can’t moderate volatility, and is not accountable for severe losses or unethical practices, they will take their capital elsewhere, which one could argue is precisely why the economic remains stagnant.
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