Step Into Liquidity.

Originally appeared in OTCM January 2013 Newsletter

A Message from Cromwell Coulson, CEO of OTC Markets Group

The past few years have witnessed a dramatic growth in the number of trading venues. Today, about one-third of trading volume in U.S.-listed securities takes place away from the exchanges on various internal broker-dealer systems, crossing networks and Alternative Trading Systems. This represents a more than 50% increase from just three years ago.

The fragmentation of trading in our financial markets mirrors a change taking place in every industry: the shift from a three-tier model of producer, distributor, retailer, to a networked community where consumers and producers connect directly through public and private networks. Apple consumers can purchase products from a retailer that is a supplied by a distributor of Apple products, a retailer that deals directly with Apple, or direct from Apple via its website or standalone stores. In a networked world, consumers connect directly with the best suppliers and no longer need an intermediary for every transaction.

The rise of networks in U.S. equity markets is allowing buyers and sellers of stocks to meet more easily. Using the Apple example, investors in Apple stock can purchase shares from brokers who place buy orders with an exchange to match them with sellers. Alternatively, brokers may use a public or private network to connect directly to other brokers who are sellers, or they can internalize the order and provide the liquidity directly to the investor without another intermediary. This networked model of trading is creating efficiencies for investors by providing buyers and sellers with a choice of trading partners and forcing intermediaries to add value or potentially be left out of the trade.

The SEC’s adoption of Regulation NMS (National Market System) in 2005 furthered this trend by enabling investors to shop around for the best supplier of liquidity and ensuring broker-dealers matched or improved the best publicly-displayed price.

As a result, today U.S. financial markets support a wide variety of business models with numerous stock exchanges, Alternative Trading Systems and broker-dealers providing liquidity and execution services to meet the unique needs of different types of institutional and retail investors. With a choice of different types of execution and liquidity providers, investors and brokers can select the destination that offers them the best liquidity and lowest total execution cost. Market fragmentation has improved the overall efficiency of trading and pricing of securities in the market.

At OTC Markets Group, we take pride in the Open, Transparent and Connected platform we have developed to unite the fragmented world of OTC market participants. Our OTC Link® ATS directly connects a diverse community of broker-dealers providing liquidity and execution services across a seamless network. Today, the world’s leading electronic broker-dealers use our technology to display prices, attract orders and conduct trade negotiations in 10,000 OTCQX®, OTCQB® and OTC Pink® securities.

By helping broker-dealers better connect with their trading partners and providing tools for companies to inform their investors wherever they analyze, value and trade securities, we can leverage the power of networks to create better informed and more efficient financial markets.

Good recap of  some key points discussed.

Great discussion with thoughtful views from a wide range of market participants.   My take away is that we have moved the debate from if we should run a pilot to a discussion of how should we run a quote increment pilot.

In averting the fiscal cliff, Congress has raised the highest tax rate on dividends to 20% from15%. The highest tax on interest income has increased to 39.6% from 35%. When you include the 3.8% healthcare tax surcharge, the taxes on dividend and interest income for investors will increase substantially in 2013.

Let’s hope Washington spends the new tax revenues wisely.

While it appears that interest is taxed more heavily than dividends, dividends are actually taxed twice: One dollar of corporate cash flow will be taxed 35% at the corporate level and 23.8% at the investor level. Interest income is taxed just once at 43.4%.

This means more than 50 cents of every dollar of earnings paid as dividends will go to federal taxes, while only about 43 cents of every dollar paid as interest goes to federal taxes.

Put another way… In 2013, a dividend investor will earn 49.5 cents on a dollar of corporate profits, while a debt investor will earn 56.4 cents, a 14% higher after-tax return. Last year, debt investors earned a 17.6% higher after-tax return compared to dividend investors.

So, Congress has shrunk the debt bias by raising the tax on investment income. They should now find it quite simple to end the debt bias by lowering the U.S. corporate tax rate to 25% from 35% on corporate income paid as dividends.

Or, they should just make dividends deductible and tax dividend income at the same rate as interest income. Either of these solutions will rid our tax code of its debt bias.

Bad Math And the Middle Class.

By N. Gregory Mankiw - a professor of economics at Harvard. He was an adviser to Mitt Romney in the 2012 presidential campaign.

IN the continuing fiscal negotiations between President Obama and House Republicans, both sides have, from the very beginning, agreed on one point: Taxes on the middle class must not rise. But maybe it’s time to reconsider this premise. An unwavering commitment to keep middle-class taxes low could be one reason the political process has become so deeply dysfunctional.

Continues at:

A mention of my Op-Ed on Double Taxation of Dividends Today

"So if you were hoping that the cliff might finally give us the opportunity for a deep rethink of something like the mortgage-interest tax deduction, or even tax expenditures more generally, think again. And other reforms are similarly not going to happen. For instance, Bob Pozen and Lucas Goodman have a sensible idea: pay for a reduction in the corporate income tax rate by allowing corporations to deduct only 65% of their interest expenses.

It’s fun to look at Pozen’s idea side-by-side with that of Cromwell Coulson: Coulson proposes that we tax dividends at the same rate that we tax income, but that we also allow all dividends to be tax-deductible to corporations.