The point of the tax is not to regulate the derivatives market. There are valid reasons for derivatives, and arbitrarily imposing a reserve requirement on a class of instruments that is ever changing and by definition, represents different alpha and beta is a bad idea. The point of the tax is to mitigate HFT strategies. In my view they don't add anything to the system when considered from the point of view of 'why' society allows/creates such systems.
Regulating crazy financial instruments will occur when what we call 'investment banks' but you could easily extend to all cooperatives that make money on financial instruments, are required to be partnerships. It's amazing how much self-regulation occurs when an actual person is personally responsible.
It is impossible to regulate a derivatives market. You and I can start trading derivative on anything tomorrow on the phone if we want.
If you tax transactions, the transactions will just disappear off into another location. A derivatives market with modern communications could be run out of a third world country in Africa using Warlords to protect the office. And the traders could still sit in New York offices.
If people want to do HFT, then let them, except where they might injure the general economy from large failures. If you think HFT is just for the pros, work out a way to bring it to the man in the street via a startup and make a fortune .
The only thing that should be done with derivatives is ensure that large financial institutions are not brought down by bad trading decisions (ie Lehman), and that small firms cannot seize up market liquidity through overleveraging (ie LTCM)
This can be covered off quite ably with capital and margin requirements. That's fair enough, and quite accepted throughout many other fields.
If you're a company raising money, investors will want to be compensated for this extra cost, thus shifting the burden onto the company and raising the cost of raising capital.
If you're an investor who wants to liquidate, you'll be offered a price lower than fair market value, as buyer will want you to cover the tax portion.
Armed with this knowledge, the rational you will think twice before converting cash into financial equity instruments. Maybe you'll choose CDs, maybe bonds, maybe stocks of foreign companies that trade on exchanges that have no such requirements.
You could probably mitigate the HFT strategies by suggesting the market stay open for just a few hours a week - enough for buyers and sellers to match outstanding bids, not worth it for HFTraders to bother.
You say high frequency trading is bad, others say shorting is bad, and when you try to regulate what is a "valid strategy", all you are doing is injuring the entire market. I can't invest soundly when not all viewpoints are reflected in the price. I'd rather just invest privately.
Regulating crazy financial instruments will occur when what we call 'investment banks' but you could easily extend to all cooperatives that make money on financial instruments, are required to be partnerships. It's amazing how much self-regulation occurs when an actual person is personally responsible.