Something I’m sure will be suggested at some point is a financial transactions tax, a tiny tax placed on every single financial transaction: stocks, bonds, and derivatives.

For example, if General Electric (GE) were $20 per share and you bought 1,000 shares, that would be $20,000 worth of stock. If there were a financial transactions tax of 5 basis points, you would pay $10 in tax on that trade. The commission is probably around $10 if you use a discount broker, so it would double your transaction costs.

$10 doesn’t seem like a lot.

A financial transactions tax (otherwise known as an FTT or a Tobin tax) is so attractive to left-leaning politicians because they look at this giant pot of money, the trillions of dollars of annual trading activity, and if you take a tiny percentage of that, 1 basis point or 5 basis points, you can raise a lot of money to… well, certainly not to pay down the deficit; nobody wants to do that.

Some people also view this as a way to “punish” the banks, though in practice, it doesn’t really work out that way, which we will discuss later.

The Good Old Days

Back in 2006, I used to make locked markets in trades as large as 1,000,000 shares of the SPDR S&P 500 ETF (SPY). I would give customers a choice of whether they wanted to buy or sell 1,000,000 SPY (at the time, about $125,000,000) at the same price, essentially letting them trade for free. I could do that because my cost to hedge, either in futures or in the basket of stock or even the ETF, was minimal.

We were awash in liquidity.

Most of that liquidity has disappeared. The Volcker Rule has made it outright illegal to trade proprietarily, and Basel III capital rules make it prohibitively expensive to carry positions, so nobody is incentivized to make markets in anything.

Liquidity is terrible. I hear this from my institutional subscribers all the time. You, the retail investor, probably don’t notice a difference, because it costs you the same to trade 100 shares of GE now as it did 10 years ago: about a penny.