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Saturday, September 18, 2010

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.