From the April 2013 issue of Futures Magazine • Subscribe!

Traders’ View: The craziness isn’t over

Financial transaction tension

Meanwhile, talk of a transaction tax has moved beyond individual countries to the European Commission itself — which wants to help states that impose an FTT collect that tax on shares traded outside their own jurisdictions. Only 11 of the European Union’s 27 member states advocate an FTT, but these include three of the EU’s four largest economies (Germany, France, and Italy). Those countries alone, however, don’t have the clout to impose an EU-wide FTT, and the United Kingdom — the EU’s third-largest economy — is glaringly absent from the list.

The Commission is considering a proposal that would let countries enforce collection of the tax across the European Union and even beyond. That means shares of a Paris-listed company traded in London would have to pay the tax, even if the United Kingdom doesn’t adopt it. It also means exchanges in the United States and other countries might have to collect the tax as a condition for listing the shares.

For people who trade with a perspective longer than a minute or two, the tax is barely noticeable at 0.1% for stock and bond trades and 0.01% of notional value for derivatives traders. For HFT practitioners, however, that amount could be deadly, which is what makes the German announcement so interesting. Under the proposal, derivatives transactions only will be taxed if they’re made by companies with an office in the country, and HFT practitioners will have to have an office in the country if the provision goes through as drafted.

For most hedgers and speculators, it’s difficult to see why currently proposed taxes would be an issue. HFT certainly has increased volumes, but it’s debatable as to whether it’s made it easier to get into and out of positions that are held for longer than a few minutes. What’s more, overall costs still will be a fraction of what they were back in the days of open outcry, and there’s a growing sense within the industry that HFT isn’t worth the headache. That sense is part of a larger debate over the relative merits of efficiency and resiliency in the marketplace. 

“Basically, efficiency is the ability of a system to grow and expand and process throughput, while resiliency is the ability of a system to recover from a shock,” says former JP Morgan Managing Director John Fullerton — an FTT advocate in the United States. Senator Tom Harkin and Congressman Peter DeFazio long have been pushing for an FTT, and they’re continuing to do so. “Economics has tended to focus on maximizing efficiency, but resiliency is only now getting widespread attention.”

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