Advocating Tax On Stock Trading

Image: Brian Rea

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Thousands of people trade trillions of dollars’ worth of stocks, bonds, currencies, commodities, and derivatives every second of every breathing moment.

When you stop and think about it, exactly why should that happen? Does the value of I.B.M. actually change from minute to minute? Is someone always in the process of discovering something truly new and valuable about Exxon Mobil or the supply of the world’s crude?

The answer, of course, is no, which is why there is a lingering sense, even among professional investors, that something about the whole process is basically no different from gambling. In times of crisis, this feeling moves from the back of the mind to the gut, where it festers. Politicians and populists attack speculative traders as parasites, blaming them for whatever crisis happens to be upon us. During the Asian financial crisis of the late 1990s, the Malaysian prime minister called George Soros a “moron” and attacked hedge fund currency traders.

In our moment of drama, the bugles have sounded to start the hunt for the market manipulators. With food and fuel costs soaring, Senator Joe Lieberman absurdly proposed barring pension funds and university endowments from investing in agricultural and energy commodities. Panicked by the plummeting shares of banks and brokerages, the Securities and Exchange Commission is trying to chase down rumors in the marketplace. The S.E.C. and Britain’s regulator, the Financial Services Authority, have both introduced measures that attempt to curtail the activities of some short-sellers, the most vilified of all speculators, citing the dubious potential for “abuse.”

These efforts come as no surprise. But they are misguided. It’s better, not worse, for people and institutions to diversify their holdings into different asset classes, such as commodities. Finan­cial markets do suffer from an endemic shortcoming, but it’s not rumor­mongering or manipulation by dark, powerful forces. It’s my­opia. Short-termism is the problem.

Trading in every capital market has grown wildly in recent years, and whole new markets, like those for derivatives, have exploded. Stocks change hands more frequently than ever. On the New York Stock Exchange, turnover hit a high of 143 percent in 1928, meaning the value of the entire market traded almost one-and-a-half times. Then turnover plummeted, staying below 20 percent from 1938 to 1975. Since then, according to a study by Dartmouth economist Kenneth French, the chart looks like the one for California home prices, pre-implosion. It rose to 59 percent in 1990 and in 2007 hit 215 percent.

Hedge funds account for much of this: They cycled through 36 percent of their positions during the first quarter of 2008, according to Goldman Sachs. But the supposedly staid mutual fund managers are not much better. Morning­star estimates their turnover rates are 93 percent a year. Even activist investors, who claim to have companies’ long-term interests at heart, hold shares for a median period of only one year, according to a recent study led by Duke University’s Alon Brav.

Market hyperactivity has been so enduring that hardly anyone notices, but the fact remains: The long-term investor is practically extinct.

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