Democratic presidential candidate Hillary Clinton is proposing new taxes on large-volume trading in financial markets, one of several measures designed to appeal to the party’s liberal nominating base as she squares off against insurgent rival Sen. Bernie Sanders (D-Vermont). The challenger’s left-wing economic populism has won him traction in some early nominating states, putting pressure on Clinton to maneuver her campaign to guard against a repeat of 2008, when a relatively unknown Barack Obama swept the party off its feet with an appeal to passion and principle.
Clinton’s strength is seen as her experience and pragmatism, although clearly the campaign is focused on the nomination, and not the inevitable pivot to the center (rhetorically, at least) that marks most presidential bids as they begin to look towards the general election.
I hope to dissect some of her proposals in greater detail in the coming days. The tax on so-called high-frequency trading, is actually a tax on order cancellations in financial markets. This is designed to penalize large-volume, computer-driven trading strategies, which Clinton and some other critics blame at least in part for market meltdowns and flash crashes; it is also designed to discourage “spoofing,” a technique that can involve submitting open orders in an effort to push the market one way or the other, and later canceling them.
Debate will no doubt ensue as to whether imposing new taxes on market trading is likely to achieve the “fairness” and stability proponents claim to desire. These new costs would however, very likely do two things:
- Reduce market liquidity, by making it more expensive to trade. Lower liquidity means higher spreads (the difference between bid and ask), which also makes transactions more costly. These direct and indirect costs will hurt both institutional and individual investors.
- Increase the cost of risk management. Small and large traders alike often rely on series of continually adjusted stop orders to protect profits and cut losses. These systems can rely on orders that are placed and later canceled and replaced with a new order to reflect market movement. Taxing order cancelations will make it more expensive to manage risk in this way, thereby potentially injecting even more risk into capital markets.
Politico and others have reported that former Secretary of State Clinton is relying on former Rep. Barney Frank (D-Massachusetts) and Gary Gentler (who helped craft Dodd-Frank) to advise her on economic matters.