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A History of Excellence & A Reputation for Success

For more than 40 years we have been advancing our clients' positions
in Washington. Our proven record for success secures our position as
one of the nation's leading government affairs law firms.

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Washington UpdateWeekly Update on Congress

James Ramage, Traders Magazine Online News, March 6, 2009

A recent House of Representatives' bill that many on Wall Street believe would destroy liquidity will never pass, according to industry experts.

The bill-H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009-is heavily flawed, lacks sufficient support on the Hill and has already failed in an earlier incarnation, they added. As written, the bill would tax each buy and sell transaction for equities, options and futures by up to 25 basis points.

"I can't believe [a transaction tax] will get any traction," Duncan Niederauer, chief executive of NYSE Euronext, told an audience on Tuesday at the Museum of American Finance. "I can't believe that would find its way to even a vote."

If it passes, the transaction tax would kill the thin-margin high-frequency trading business, which many say represents an estimated two-thirds of the daily volume in equities.

Rep. Peter DeFazio, D-Ore., introduced the bill on Feb. 13. It has since been referred to the House Committee on Ways and Means, where it sits, according to the House of Representatives' Web site.

The committee has yet to address the bill because it's too soon, said John Giesea, president and chief executive of the Security Traders Association.

"By word of mouth, it's not given great chance of passage," he said. "But we've taken the conservative approach that it's so outrageous that we thought we'd speak up, and speak loudly, to ensure it's not going to get passed."

Another industry source, who declined to give his name, said the transaction tax bill lacks momentum because DeFazio sits on the wrong committees to move the bill forward. He added that such a bill has been introduced before and rejected.

On Sept. 26, DeFazio introduced H.R. 7125-Let Wall Street Pay for Wall Street's Illiquid Assets Act of 2008. Then, as now, the bill called for a transaction tax of 25 basis points "of the value of the instruments involved in such transaction," according to the bill.

The bill had 34 sponsors, and, as now, was referred to the House Committee on Ways and Means. It went nowhere.

"It got some traction last fall with Blue Dogs and others who are concerned about the size of our debt," DeFazio told Traders Magazine in an email. "It is one idea about how to deal with the TARP money that is fair and equitable and I think deserves to be a part of the conversation, so I introduced it again."

Every year, roughly 5,000 bills are introduced, while a few hundred pass, he added. DeFazio's hope this time is that the tax becomes part of the Ways and Means conversation about how to recoup the TARP funds. "I am throwing it into the mix," he said, "but I have no expectations."

David Franasiak, head of the financial services practice at the law firm of Williams & Jensen, and who lobbies for the STA in Washington, D.C., said the bill packs more rhetoric than common sense. Still, he added, the bill's impact would prove too devastating not to take considerable preventive measures now.

In addition to circulating a letter to its members last month, the STA plans to send a formal letter to the Ways and Means Committee and the House Financial Services Committee, Franasiak said. It's important for the various Congressional members and bill co-sponsors to know that a transaction tax of 25 basis points is not a good approach, he added, and would be very harmful to the market going forward.

"Times have changed [since the September bill failed], and certainly, back then, you didn't have the House, Senate and the Presidency controlled by one party," Franasiak said. "There were checks and balances, to a degree. Now, we have a different situation, where clearly things that couldn't pass in prior Congresses may be able to pass now."

Transfer taxes aren't new to Wall Street. The United States imposed a transfer tax of 0.2 percent on stock trades between 1914 and 1966.

"It clearly did not destroy the market then, and it won't now," DeFazio said.

Investors now pay the federal government $5.60 per million dollars of face value to fund the Securities and Exchange Commission-under Section 31 of the Securities Exchange Act of 1934.

The trading industry underwent a massive overhaul after equities began trading in penny increments in 2001. As trading went electronic, high-frequency traders replaced the specialists and market makers who fled the inside market due to narrower bid-ask spreads that raised their risk profile.

A steep hike in transaction costs would kill off high-frequency market makers operating on wafer-thin margins first, several in the industry said. By some estimates, they comprise about two-thirds of daily volume.

The concern within the trading industry is that if high-frequency traders were taxed, their profits would turn to losses and they would exit the business. If they left, liquidity would disappear for all market participants.

Details for the bill have yet to emerge. As written, it would amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions enough to recoup the net cost of the Troubled Asset Relief Program.

The bill's findings argue that because the $700 billion TARP fund and the new Federal Reserve lending facilities were created to protect Wall Street investors, the same Wall Street investors should pay for the infusion of taxpayer money.

"The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor," the bill states. "This transfer tax would be on the sale and purchase of financial instruments such as stock, options and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year."

"The banks should be paying for their own bailout," DeFazio said. "I am throwing this out there because I think it is an equitable way to recoup our costs."

Industry experts have said the proposed bill would significantly increase trading costs, widen bid-ask spreads, ruin high-frequency market making firms, slice volumes and move trading to overseas markets.

Washington UpdateWeekly Update on Congress

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