Could A “Transaction Tax” Be A Good Thing?
Could A "Transaction Tax" Be A Good Thing?
Authored by Lance Roberts via RealInvestmentAdvice.com,
I recently discussed why “Free, Isn’t Really Free” regarding the retail investor. While “free trades” have certainly reduced…
Share this:
Authored by Lance Roberts via RealInvestmentAdvice.com,
I recently discussed why “Free, Isn’t Really Free” regarding the retail investor. While “free trades” have certainly reduced the transaction costs, the selling of data to the highest bidder has likely cost investors more than they saved. To wit:
“As is clear from the billions paid for order flow and the billions made from executing those orders, there is no such thing as ‘free trading.’ Thus, the claim of ‘commission free trading’ is often no more than a rhetorical ruse to attract new investors and distract from the billions of dollars in PFOF and other hidden costs that ultimately come out of retail investors’ pockets. It’s pretty clear that these intermediaries are often merely transferring the investors’ visible upfront commissions into invisible after-the-fact de facto commissions.”
However, there is another problem with “free trading” that will likely reduce your investing outcomes over time.
It’s A You Problem
Over the years, I’ve heard from several clients who have had trouble disciplining themselves from trading too frequently. That was in a low-cost world.
Now that trades are no-cost, it’s going to get a lot worse.
It’s difficult enough to match, much less beat, stock indexes without the drag of frequent trading. Frequent traders, from my experience, rarely do well in the stock market.
A Kiplinger article noted the same.
“In one study, Odean found that trading costs did indeed weigh on the performance of investors who traded more frequently. Such is a problem that no-commission accounts will render obsolete.
But no-commission trades won’t do anything about the results garnered from another study. Odean found that, ‘on average, the stocks these investors bought went on to underperform the stocks they sold.’
Speculative trading (trades that didn’t seem driven by, say, tax purposes or rebalancing concerns) was even worse. Across all trades, stocks that investors bought underperformed those they sold by three percentage points. However, that disparity widened to five percentage points when considering only speculative trades.
The zero-commission trade is bound to amplify the low-cost proposition of exchange-traded funds. By accelerating the huge migration of investor dollars away from actively managed mutual funds. Now, if investors simply stuck to buying broad-based index ETFs and holding them, that actually would be a good thing.
But what’s far more likely is that a big swath of these investors will trade more. They will try to pick ETFs and stocks that will beat the market over short time periods. After all, the trade is free – why not make it?”
Psychological Drag
So free trading may save you money on trading costs, but if it causes you to trade rashly, your returns may suffer. For most investors, investment returns are a much bigger deal than trading costs. Therefore, being able to trade for free can be counter-productive if it tempts you to become a day trader and tank your investment performance.
Such was the conclusion of Daniel Wiener, editor of The Independent Adviser.
“Free trading doesn’t help investors. It only encourages bad behavior. As someone who’s been managing client assets for more than 25 years, we talk about ‘time in the market, not market timing’ because long-term investing works.”
The annual Dalbar Investor Survey shows the same. Equity investors consistently do worse than the index.
Such is due primarily to the psychological pitfalls that occur from “herding” to “confirmation bias.”
“When discussing investor behavior it is helpful to first understand the specific thoughts and actions that lead to poor decision-making. Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance.” – Dalbar
Another study by Barber, Lee, Liu, and Odean shows much the same:
“On average, individual investors lose money from trading. Barber and Odean (2000) document that the majority of losses incurred can be traced to trading costs. However, trading costs are not the whole story. On average, individual investors have perverse security selection abilities. They buy stocks that earn subpar returns and sell stocks that earn strong returns (Odean (1999)). In aggregate, the losses of individuals are material” – Barber, Lee, Liu, and Odean
Shrinking Holding Periods
Repeated studies show that long-term holding periods lead to better outcomes. Short-term trading, driven by overconfidence, generally leads to worse.
“The length of time that investors hold shares has been shrinking for decades but the trend accelerated this year. There are different ways of slicing it. However, Reuters calculations of NYSE exchange data show the average holding period for U.S. shares was 5-1/2 months in June. This was a decline from 8-1/2 months at end-2019.
The previous record low of six months was hit just after the 2008 crisis. In 1999, for example, 14 months was the average.” – Reuters
Why are holdings times shrinking?
“From 0% interest rates, pandemic-induced volatility to sports gamblers that are bored to death at home due to lack of sports betting. Then there are the millennials living in their parents’ basements with nothing else to do. Also, the day-traders by the millions playing the market using the Robinhood app. And the unemployed trying to multiply their $600+ weekly unemployment checks and also have fun doing it. Don’t forget those same people also throwing the $1,200 stimulus checks into the market to make some money to pay bills, etc. Not to mention algorithm-based machine trading by big institutions, locked-down realtors unable to flip houses finding their luck in the stock market, etc.” – David Hunkar via TFS
While the reasons for the continuing decline in holding periods are many, commission-free trading is exacerbating that trend by removing the “brake pedal” from the speeding car.
Whatever the cause, ultimately, investors’ inability to hold stocks for the long-term is damaging for the market and investors. Simply churning stocks all day long or even holding them for only a few months will not lead to a growing and robust equity market.
Right Solution For The Wrong Reason
One of the proposals by Democratic candidates, and hinted at by the current Biden Administration, is a “Financial Transaction Tax (FTT).”
An FTT is a proposal to place a “tax” on buying and selling a stock, bond, or other financial contracts like options and derivatives. Taxing stock trading is not new. America already has an FTT, albeit extremely small: currently set at roughly 2 cents per $1,000 traded.
According to the Brookings Institute, there are many problems with an FTT, harming savers and investors, reducing economic growth, and failing to raise the promised revenue by driving activities to lower-taxed areas overseas.
An FTT is a wrong proposal to solve the Government’s persistent overspending problem. However, it could reapply a “brake pedal” to slow over-trading by individuals. It also could discourage hedge funds from more predatory practices. Such could improve holding periods and longer-term returns.
The Wall Street Journal reported that online brokerages see record spikes in new accounts and trading activity in recent months. The authors argue this trend is due in part to the industrywide move to zero-commission trading. Platforms like E*Trade and Robinhood exacerbate this trend by providing individual investors to trade with few restrictions.
“Many are young and first-time traders confronting the first economic downturn of their professional lives. Yet with free trading at their fingertips and massive online communities with which to discuss trading ideas, many figure they have little to lose.
Research shows that individual investors tend to underperform the broader market, in part because of frequent trading. That hasn’t stopped scores of traders from taking the plunge.” – WSJ
Slowing It Down
As discussed previously, the selling of customer data provides high-frequency trading firms the ability to front-run retail investors.
“If people can find trading patterns and use that to make money, then fair play to them, but they should not be able to do that by selling information that does not belong to them. If they do not sell the information to anyone else, that reduces the scope for front running.” – Financial Times
The removal of payment for order flow, and a return to a transaction fee, remains the most sensible option. But, an FTT could accomplish the same.
“Proponents and opponents alike agree that an FTT would reduce high-frequency trading, or HFT. The profit margins on these individual trades are typically small—for example, profit margins could be as little as a few cents in a heavily traded stock. An FTT would make these trades unprofitable and drastically reduce, or even eliminate, HFT activity.” – Tax Foundation
While an FTT may indeed impact retail investors, resulting in reduced trading volume, it may also help squash the predatory effects of hedge funds and HFT’s.
“Some HFT-oriented trading firms have allegedly engaged in heavily scrutinized (and in some cases illegal) practices, publicized in Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt. These practices include frontrunning (detecting a large buy/sell order and moving in front of it in anticipation of the resulting price movement) and slow-market arbitrage (simultaneously buying and selling securities on separate exchanges to exploit small, transient price discrepancies).”
The removal of payment for order flow, and a return to a transaction fee, remains the most sensible option. But even an FTT might be worth considering if it reduces professional firms’ ability to take advantage of retail traders.
Free And Fair
As a fiscal conservative, I’m not too fond of taxes of any sort. I am a firm believer in “free markets.” However, for “free markets” to work effectively, they must also be “fair markets.”
Our current capital market system may be “free,” but it is not “fair” in many ways. Regulators should take steps to ban payment for order-flow, restrict high-frequency trading, and create markets that protect retail investors from predatory practices.
Such would mean that firms providing transaction services would have to go back to charging a commission for their services. But such would potentially have the knock-off effect of “slowing things down” and providing better investors’ outcomes.
However, the reality is that since Wall Street owns regulators, those money-making schemes already in place are likely to remain.
Therefore, while not a proponent, I can make the case an FTT would raise financial transaction costs, resulting in fewer of them. How this affects the overall economy depends on whether the reduced trading is beneficial. If it is, will the reduction will be significant enough to have an impact that goes beyond the investors and traders involved.
While the emergence of zero-commission trading is generally a win for investors, there’s one potential downside - the temptation to over-trade. In other words, it could be more tempting to move in and out of stock positions more frequently because it doesn’t cost anything to do it.
Don’t make this mistake. Although there are certainly some good reasons to sell stocks, the lack of trading commissions isn’t one of them.
But what we do need are “free” and “fair” capital markets.
Uncategorized
Key shipping company files for Chapter 11 bankruptcy
The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.
Share this:
The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.
The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.
Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible
Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.
The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.
Lawsuits force companies to liquidate in bankruptcy
Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.
California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.
The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.
The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.
In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.
Shutterstock
Nationwide Cargo seeks to reorganize its business
Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.
The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.
Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)
The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023. From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy pandemic covid-19 stocksUncategorized
Key shipping company files Chapter 11 bankruptcy
The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.
Share this:
The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.
The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.
Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible
Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.
The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.
Lawsuits force companies to liquidate in bankruptcy
Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.
California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.
The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.
The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.
In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.
Shutterstock
Nationwide Cargo seeks to reorganize its business
Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.
The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.
Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)
The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023. From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy pandemic covid-19 stocksUncategorized
Tight inventory and frustrated buyers challenge agents in Virginia
With inventory a little more than half of what it was pre-pandemic, agents are struggling to find homes for clients in Virginia.
Share this:
No matter where you are in the state, real estate agents in Virginia are facing low inventory conditions that are creating frustrating scenarios for their buyers.
“I think people are getting used to the interest rates where they are now, but there is just a huge lack of inventory,” said Chelsea Newcomb, a RE/MAX Realty Specialists agent based in Charlottesville. “I have buyers that are looking, but to find a house that you love enough to pay a high price for — and to be at over a 6.5% interest rate — it’s just a little bit harder to find something.”
Newcomb said that interest rates and higher prices, which have risen by more than $100,000 since March 2020, according to data from Altos Research, have caused her clients to be pickier when selecting a home.
“When rates and prices were lower, people were more willing to compromise,” Newcomb said.
Out in Wise, Virginia, near the westernmost tip of the state, RE/MAX Cavaliers agent Brett Tiller and his clients are also struggling to find suitable properties.
“The thing that really stands out, especially compared to two years ago, is the lack of quality listings,” Tiller said. “The slightly more upscale single-family listings for move-up buyers with children looking for their forever home just aren’t coming on the market right now, and demand is still very high.”
Statewide, Virginia had a 90-day average of 8,068 active single-family listings as of March 8, 2024, down from 14,471 single-family listings in early March 2020 at the onset of the COVID-19 pandemic, according to Altos Research. That represents a decrease of 44%.
In Newcomb’s base metro area of Charlottesville, there were an average of only 277 active single-family listings during the same recent 90-day period, compared to 892 at the onset of the pandemic. In Wise County, there were only 56 listings.
Due to the demand from move-up buyers in Tiller’s area, the average days on market for homes with a median price of roughly $190,000 was just 17 days as of early March 2024.
“For the right home, which is rare to find right now, we are still seeing multiple offers,” Tiller said. “The demand is the same right now as it was during the heart of the pandemic.”
According to Tiller, the tight inventory has caused homebuyers to spend up to six months searching for their new property, roughly double the time it took prior to the pandemic.
For Matt Salway in the Virginia Beach metro area, the tight inventory conditions are creating a rather hot market.
“Depending on where you are in the area, your listing could have 15 offers in two days,” the agent for Iron Valley Real Estate Hampton Roads | Virginia Beach said. “It has been crazy competition for most of Virginia Beach, and Norfolk is pretty hot too, especially for anything under $400,000.”
According to Altos Research, the Virginia Beach-Norfolk-Newport News housing market had a seven-day average Market Action Index score of 52.44 as of March 14, making it the seventh hottest housing market in the country. Altos considers any Market Action Index score above 30 to be indicative of a seller’s market.
Further up the coastline on the vacation destination of Chincoteague Island, Long & Foster agent Meghan O. Clarkson is also seeing a decent amount of competition despite higher prices and interest rates.
“People are taking their time to actually come see things now instead of buying site unseen, and occasionally we see some seller concessions, but the traffic and the demand is still there; you might just work a little longer with people because we don’t have anything for sale,” Clarkson said.
“I’m busy and constantly have appointments, but the underlying frenzy from the height of the pandemic has gone away, but I think it is because we have just gotten used to it.”
While much of the demand that Clarkson’s market faces is for vacation homes and from retirees looking for a scenic spot to retire, a large portion of the demand in Salway’s market comes from military personnel and civilians working under government contracts.
“We have over a dozen military bases here, plus a bunch of shipyards, so the closer you get to all of those bases, the easier it is to sell a home and the faster the sale happens,” Salway said.
Due to this, Salway said that existing-home inventory typically does not come on the market unless an employment contract ends or the owner is reassigned to a different base, which is currently contributing to the tight inventory situation in his market.
Things are a bit different for Tiller and Newcomb, who are seeing a decent number of buyers from other, more expensive parts of the state.
“One of the crazy things about Louisa and Goochland, which are kind of like suburbs on the western side of Richmond, is that they are growing like crazy,” Newcomb said. “A lot of people are coming in from Northern Virginia because they can work remotely now.”
With a Market Action Index score of 50, it is easy to see why people are leaving the Washington-Arlington-Alexandria market for the Charlottesville market, which has an index score of 41.
In addition, the 90-day average median list price in Charlottesville is $585,000 compared to $729,900 in the D.C. area, which Newcomb said is also luring many Virginia homebuyers to move further south.
“They are very accustomed to higher prices, so they are super impressed with the prices we offer here in the central Virginia area,” Newcomb said.
For local buyers, Newcomb said this means they are frequently being outbid or outpriced.
“A couple who is local to the area and has been here their whole life, they are just now starting to get their mind wrapped around the fact that you can’t get a house for $200,000 anymore,” Newcomb said.
As the year heads closer to spring, triggering the start of the prime homebuying season, agents in Virginia feel optimistic about the market.
“We are seeing seasonal trends like we did up through 2019,” Clarkson said. “The market kind of soft launched around President’s Day and it is still building, but I expect it to pick right back up and be in full swing by Easter like it always used to.”
But while they are confident in demand, questions still remain about whether there will be enough inventory to support even more homebuyers entering the market.
“I have a lot of buyers starting to come off the sidelines, but in my office, I also have a lot of people who are going to list their house in the next two to three weeks now that the weather is starting to break,” Newcomb said. “I think we are going to have a good spring and summer.”
real estate housing market pandemic covid-19 interest rates
IFM’s Hat Trick and Reflections On Option-To-Buy M&A
Q4 Update: Delinquencies, Foreclosures and REO
Net Zero, The Digital Panopticon, & The Future Of Food
Pharma industry reputation remains steady at a ‘new normal’ after Covid, Harris Poll finds
These Cities Have The Highest (And Lowest) Share Of Unaffordable Neighborhoods In 2024
For-profit nursing homes are cutting corners on safety and draining resources with financial shenanigans − especially at midsize chains that dodge public scrutiny
Part 1: Current State of the Housing Market; Overview for mid-March 2024
Tight inventory and frustrated buyers challenge agents in Virginia
The Question You Should Ask Whenever You’re Wrong
Trump nearly derailed democracy once − here’s what to watch out for in reelection campaign
-
Uncategorized3 weeks agoAll Of The Elements Are In Place For An Economic Crisis Of Staggering Proportions
-
International7 days agoEyePoint poaches medical chief from Apellis; Sandoz CFO, longtime BioNTech exec to retire
-
Uncategorized4 weeks agoCalifornia Counties Could Be Forced To Pay $300 Million To Cover COVID-Era Program
-
Uncategorized3 weeks agoApparel Retailer Express Moving Toward Bankruptcy
-
Uncategorized4 weeks agoIndustrial Production Decreased 0.1% in January
-
International6 days agoWalmart launches clever answer to Target’s new membership program
-
Uncategorized4 weeks agoRFK Jr: The Wuhan Cover-Up & The Rise Of The Biowarfare-Industrial Complex
-
Uncategorized3 weeks agoGOP Efforts To Shore Up Election Security In Swing States Face Challenges