Will flash trades now lead to a financial transaction tax?

Renowned author Michael Lewis’s charge that the stock market is rigged against regular investors is making waves in Washington.

Liberal lawmakers in particular believe Lewis is bringing critical attention to an issue that could boost their efforts to assign a tax on all financial transactions.

{mosads}Rep. Keith Ellison (D-Minn.) joined with civil rights advocates Friday to hold a rally pushing his financial transaction tax bill.

At the event, he mentioned Lewis’s book Flash Boys and blasted high-frequency traders as “predatory” and “parasitic.”

Lewis asserts that Wall Street firms have invested millions to obtain a split-second advantage on market moves.

“The insiders are able to move faster than you,” he told “60 Minutes” on Sunday.

Those claims made Lewis the center of a heated debate about the worth and potential dangers of trading at the speed of light, something that has come up in the past but not to the degree with which it is now in the spotlight.

Attorney General Eric Holder on Friday told lawmakers that the Justice Department is looking into whether people are getting an “inappropriate advantage” through flash trades. And a pair of financial regulators, the Securities and Exchange Commission, and Commodity Futures Trading Commission, also said they were looking into matters tied to the trading practice.

Proponents of a tax on all financial transactions argue it would do away with unfair high-frequency traders, and would also boost U.S. tax revenue and reap more funds from Wall Street.

If investors have to pay a small tax every time they make a trade, that would erase the edge for traders who rely on tiny profits made over and over again.

“These are wafer-thin profits,” said Ellison. “If it’s not profitable, they won’t do them.”

Backers of such a tax acknowledge they face extremely long odds on passage, and the idea largely remains isolated among the more liberal members of Congress.

“Clearly, we’re not going anywhere with the Republicans on any taxes at this point,” said Rep. Peter DeFazio (D-Ore.), who has sponsored his own transaction tax.

Nonetheless, the fresh debate has given backers a new opportunity to push their ideas foreword, with the hope that it can gain traction in the future.

“I was on CNBC the other day to talk about this, and I think it was the first time I’d been on one of those networks and they weren’t just attacking me,” said DeFazio. “Right now, Wall Street is kind of bunkering down … they’re at risk and they know it.”

But while Wall Street critics hope the renewed debate improves their odds, so far it does not appear as if Republicans are feeling swayed. Rather, they argue that any problems around speedy trading can’t be blamed on the pace of the trade, but the motives of the people behind it.

“I don’t think we can conclude at this point that speed of execution necessarily means the market is rigged,” said Sen. Pat Toomey (R-Pa.), who spent time as a financial trader. “It’s not clear to me at this point that there’s any legislation required.”

In high-frequency trading, investors rely on computer algorithms to allow them to react in milliseconds to market moves, making thousands of trades in an effort to carve out small profits over and over again. Critics argue the practice increases volatility in the market and might give some an unfair advantage, while proponents say the tool is an innovation that helps keeps markets liquid and accessible.

Sen. Mark Kirk (R-Ill.) said speedy trading was critical to commodities markets based in his home state, and criticism amounted to “demonizing of things we don’t understand.”

“The moment Congress starts regulating how trading happens, it could be as messed up as ObamaCare,” he added.

Supporters of a new transaction tax would also need to overcome their own party’s president. The Obama administration has previously opposed a financial transaction tax and reiterated that stance amid the renewed debate.

“The administration has previously opposed a financial transactions tax on the grounds that it could be vulnerable to evasion, create incentives for financial reengineering, and burden retail investors,” said a Treasury Department representative.

At this point, it is unclear whether the various regulatory and criminal probes will lead to any substantive charges. Mark Wetjen, the acting head of the CFTC, said Thursday he did not think markets he oversees were unfairly rigged by the practice.