The White House said on Sunday that a financial transaction tax on GameStop-like trading deserved additional study. It could be part of a more significant evaluation of such a tax for revenue and market stability.
The leading proposal amounts to a $1 surcharge on every $1,000 of transactions. The White House claims it is too small for a retail investor to notice it. However, it has caused a deep fracture. For progressives, it is a smart way to curb predatory trading simultaneously. At the same time, it will fund ambitious programs to ease the inequality problem in the US.
Meanwhile, opponents point at an FTT as a nightmare.
The financial industry argues that even a 0.1% levy on transactions will cause market players to pass the costs on to consumers. It will make it harder to buy and sell securities by decreasing liquidity, which measures how easy it is to buy and sell securities. Some Wall Street firms could even try to move their operations outside the country to avoid the tax.
What’s happening with Gamestop?
The House Financial Services Committee’s investigation consisted of questioning people related to the GameStop stock surge last month.
Short selling consists of borrowing the shares of a company and then selling them to force the price down, after which the seller buys the shares at the lowest price and returns them to the lender, making a profit on the sale transaction.
GameStop was a target of the squeeze. It had been heavily sold by short-sellers, to the point where about 140% of its shares were shorted. In other words, some shares had been borrowed more than once in the short sale.
Using the Robinhood stock-buying app and posts in a Reddit app that fueled the GameStop purchase, retail investors started a buying frenzy, forcing the price up – from $19 earlier this year to more than $330. It was a 1,500% increase. The deal depended on forcing short sellers to start buying to cover their trades. It led Melvin, an American investment management firm, to lose $3 billion.
But it came to an abrupt end when Robinhood suspended purchases of GameStop shares and several other shortened stocks. The price plummeted, causing huge losses, sometimes hundreds of thousands of dollars, for relatively small investors. Some of them had taken out large loans, even mortgages, to enter into speculation in the hope of making a fortune overnight.