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Old Today, 06:34 AM
 
Location: Wartrace,TN
5,598 posts, read 8,957,253 times
Reputation: 11131

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I would post this in the investing forum however I believe the thread will be more political than financial.

My question is regarding the proposed tax on derivatives and specifically the futures markets. I have seen people proposing a .02% to .005% tax on derivatives (Futures) and am curious what value will be taxed.

Will it be the full value of the underlying futures contract? As an example the 6E (Euro FX)contract is 125,000 euro's

0.02% X 125000 = 25.00 x 2 = 50 dollars round trip per contract.
0.005% X 125000 = 6.25 x 2 = 12.5 dollars round trip per contract.

Now the EruoFX contract tick size is 6.25. If the .02% figure is used there would be a 8 tick "tax" on every trade winner or loser. If the .005% tax is used there would be a Two tick tax. Even the worst commision plus exchange fees is under five dollars round trip.

OR will they be taxing the margin requirement? In the case of the 6E it is 500 dollars per contract.

0.002% x 500 = .10 x 2 = .20 cents R/T
.00005 x 500 = .025 x 2 = .05 cents R/T

Does anyone know the "plan"? End of Question. Below is why I think its a bad idea.
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In my opinion it would be insignificant to most traders if they taxed the margin amount for most traders other than the HFT. If they plan on implementing a tax on the full value they might as well shut the futures exchanges down. There are traders that regularly trade 50 to 100 contracts at a time. Do these people proposing this tax think that a trader would pay 2500 to 5000 dollars in tax each time they place a trade? There are some traders that scalp the market for 3-5 ticks a trade; they would not produce any revenue from this tax because they would cease trading.

Let's say this tax becomes a reality. The markets would become extremely volatile. Doubtful many have watched the orderbook prior to a major news announcement but it would be like that all the time. Nobody would be trading other than those entities that NEED to hedge commercial transactions AND the market would become useless for that purpose. Example; let's say your business just sold 12,500,000 dollars of goods to a Euro customer on net 30 terms. You do not know what the value of the euro will be in 30 days so you hedge it by selling 100 contracts. You have locked in your sales price. Not let's say there is low liquidity in the market and try to trade 100 contracts. You could lose thousands in slippage alone IF you can find anyone to take the other side of your trade. The small traders are providing liquidity for the larger traders. You place a tax on an activity you see less of that activity. Less liquidity = volatility.

I understand the reason for this proposed tax is in order to give "free stuff" to other people. Those proposing the tax blame "Wall Street" for the financial collapse. They feel that "Wall Street" should be punished for the collapse. Now I ask you this; in what way did the futures market contribute to the housing collapse? It was the banks giving mortgages to anyone with a pulse that caused the collapse. How about we implement a "mortgage tax"?

If a tax is needed to have universal healthcare then EVERYONE should bear the burden AND it should target unhealthy behavior. A combination tax on High Fructose corn syrup, Alcohol and Fast food would be more appropriate.
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