But there is a possible benefit.  Trading volumes have exploded over the last two decades, increasing eight-fold in equities. That’s driven to a large degree by innovation—high-frequency trading, algorithmic and quantitative strategies and the like.

A 10 basis point FTT would likely result in a more than 50% reduction in trading volume. If you think high-frequency trading and other trading innovations have been helpful to the efficient allocation of capital, you might not like that result. On the other hand, if you think a lot of that activity is essentially rent-seeking behavior that doesn’t particularly enhance fundamental price discovery or the allocation of capital in the economy, you might be perfectly content.

There are grounds to believe that a reduction in high frequency and algorithmic trading could be a positive development, or at a minimum have limited costs. A study recently published by the Financial Conduct Authority in the UK suggests that some forms of high-frequency trading act as a small tax on investors. And there’s little hard evidence that the explosion in trading activity has done much to enhance the efficiency of capital allocation or increase economic growth.   

A properly designed FTT would not, as critics claim, impede the functioning of U.S. markets or threaten our role as a source of innovation or capital formation. Given the significant revenue it could raise, and its strongly progressive distribution, an FTT should be part of any revenue package to fund the public investments that all the current candidates for president, including the incumbent, say they want to make. If it’s not already part of their campaign platforms, it ought to be, for the good of all Americans.

This article was provided by Bloomberg News.

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