- Raghaba Sahu
To significantly reduce financial market volatility by imosing a fee on transactions significantly deviating from the previous closing.
Problem: It has been observed that since the housing/financial crisis of 2008, the stock/bond markets have been very volatile. The market is a positive feedback system which causes these day-to-day wild fluctuations. This reduces the confidence of the primary investors in the market system and may lead to another crisis.
Solution:The volatility can be significantly reduced by imposing a fee if the transaction value of a stock/bond drifts beyond a specified (say +/- X) % of the previous day’s closing. The fee shall be a specified (say Y) % of the % variation beyond the specified X. X and Y can be specified by the concerned Regulator or Exchange. If the transaction value is higher than the previous day’s closing+X%, then the buyer pays the fee. If the transaction value is lower than the previous day’s closing-X%, then the seller pays the fee.
Use of Fees collected: The fees collected can be used to create an Investor Protection Fund. If a Broker (Ex: MF Global) becomes bankrupt, then the fund can be used to compensate the affected investors.