September 26, a Saturday, is a worrying day for New Jersey lawmakers hoping to generate billions of dollars in annual revenue from a financial transaction tax targeting New York-based exchanges that currently rely on electronic infrastructure located across the river in New Jersey. On this day, all US-based exchanges will simulate a day of trading using their backup sites in the Midwest.
Geographically dispersed backup sites have always been cautious, but this time the test is about more than a potential downtime in New Jersey; it’s also an attempt to permanently outsource data processing if New Jersey goes through its new financial transaction tax. The New York Stock Exchange (NYSE) goes further: when the markets open the following Monday, it will run one of its five Illinois subsidiary exchanges throughout the week, a demonstration of its ability and willingness to outsource its electronic processing to avoid discriminatory New Jersey taxation.
Such a relocation is not without cost and may encounter some initial difficulties, but the notion that it would be extremely difficult to move data processing out of New Jersey is greatly exaggerated. Those who need low latency for high frequency trades can have their own processing follow trades in digital offshoring which does not require staff transfer and it would, in fact, be the most incentive traders to avoid l ” impact of a tax on financial transactions, which is imposed on each trade in a share or other financial instrument (above certain thresholds).
New Jersey is an ideal location for the NYSE and Nasdaq data centers based in New York. Chicago-based Cboe Global Markets, which acquired the New Jersey-based National Stock Exchange, also maintains some processing in New Jersey. There are advantages to a location in New Jersey but the three exchanges report that these benefits are not significant enough to prevent them from moving their transactions to data centers elsewhere. This is not an empty threat: it is entirely in their power and would probably be worth it.
The New Jerseys proposal, a 0.25 cent tax on every financial transaction processed in the state, has won favor with Governor Phil Murphy (D) and Senate Speaker Steve Sweeney (D), who have often been in disagreement over tax policy proposals. Governor Murphy, however, cautioned against including the projected tax revenue in the budget, fearing that stock exchanges could sue over the implementation of the taxes.
They might very well. The proposed tax is not an excise tax on the use of data processing in the state; it is a tax on each share traded, even though neither party to that transaction is necessarily in the state. However, it may be easier than to continue.
About ten years ago, the CME group, which is home to both the Chicago Mercantile Exchange and the Chicago Board of Trade, secure concessions of Illinois who largely exempted them from tax increases when the company made it clear that the name and history notwithstanding were not strictly tied to Chicago. Here the process is much simpler. Exchanges wouldn’t have to leave Wall Street; they would simply arrange for the electronic processing to take place somewhere other than their current location in New Jersey.
If implemented, the New Jersey Financial Transaction Tax would be a flat tax imposed per instrument, not per trade, meaning a purchase of 1,000 shares would generate $ 2.50 in taxes. As we noted previously, this rate may seem low, but it would quickly be pyramidal because the same instrument is traded and therefore taxed several times.
Since the tax is imposed on a per trade basis, the effective rate would be much higher on stocks that trade at lower prices, typically, but not always, associated with small and mid cap stocks. The effective rate on the sale of a Berkshire Hathaway Class A share ($ 328,430 at the opening of business on September 14) would be 0.00000076 percent, while the rate on the sale of a Sirius FM share ( $ 5.51 when markets open) would be nearly 60,000 times higher at 0.045 percent.
At a price of, say, $ 40 a share (some large companies are trading for orders of magnitude higher), the tax on new jerseys on Wall Street deals would be three times the so-calledTax according to article 31designed to support all regulatory activities of the SEC. A state FTT would increase both explicit and implicit transaction costs, reducing the volume of transactions and lowering the price of assets by drawing on investors’ profits. This would in particular reduce high frequency trading. These types of jobs generate very low profit margins and are therefore more affected by taxes. Although the primary tax burden is on the wealthy, it is likely expected that all investors will see portfolios fall in value due to falling asset prices. Additionally, restricting high-frequency trading can reduce liquidity, blocking investors when stock prices fall.
In July, we observed that offshoring the electronic processing of these transactions was a realistic response to the threat of a multibillion-dollar distortion tax imposed on transactions that simply pass through a state’s digital infrastructure. As major exchanges prepare to test the capacity of their servers elsewhere, lawmakers in New Jersey may be forced to rethink the viability of their proposal.
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