New research slams “cynical” financial transaction tax
The imposition of a financial transaction tax in Italy on Friday has prompted condemnation from senior financial market observers, who are warning that the new rules could tip Europe into a liquidity drought that will damage banks and asset managers, punish traditional market participants and encourage a slide away from equities towards other asset classes.
On 1 March, Italy introduced a financial transaction tax. The Italian tax charges 0.1% for equity market transactions on regulated markets or MTFs and 0.2% on OTC transactions; it applies to all shares issued by Italian resident companies with a capitalisation of more than €500 million. ADRs and GDRs are also covered; there is a separate fixed fee for derivatives depending on the contract. In addition, there is a further 0.02% on high-frequency traders on the countervalue of orders cancelled or amended by HFT systems. France introduced its own financial transaction tax in August last year; nine other European member states are due to adopt their own version in the coming months.
The proponents of a financial transaction tax argue that the measure is a fair means of both raising new revenue, and punishing the financial sector for the financial crisis. The European Commission has estimated that the tax could raise up to €35 billion. However, critics such as Steve Grob, director of group strategy at technology company Fidessa, have pointed out that the tax will simply be passed down the line until it reaches the end consumer, resulting in more expensive pensions, insurance premiums and other investments for the general public. “Perhaps the real motive is simply a somewhat cynical attempt to introduce a tax that will ride on popular support for bank bashing,” said Grob.
Other observers have warned that the effect may be to drain liquidity away from Europe’s already struggling equity markets – potentially pushing both buy- and sell-side firms towards trading derivative instruments such as futures instead. European equity trading volumes have fallen from €1.253 trillion in October 2008 to €693.7 billion in February 2013, according to figures provided by Thomson Reuters.
“Now is not the time to be taxing any potential recovery,” said Rebecca Healey, senior analyst at financial research firm TABB Group. “This is the wrong time for the transaction tax. The more complex it becomes to trade, the less advantage there is to trade European equities. The end result may well be to drive up volatility in the markets and push even more flow towards the dark pools – almost exactly the opposite of what was intended.”
France saw its share of Europe’s stock trading activity fall from 17.3% in 2011 to just 11.88% in January this year – a fall of 26%, according to TABB Group statistics.
For banks and asset managers, a switch away from equities towards other assets could potentially mean pressure to established business models, difficulties with the cost of connectivity to new venues that specialise in the right kind of instruments, and costs associated with getting to grips with new trading strategies. New venues such as CME Europe have recently established themselves in London to take advantage of the EC’s separate EMIR legislation, which requires centralised clearing of OTC derivatives, on the basis of an expected ‘futurisation’ of OTC markets as participants switch to exchange-traded futures. Healey also implies that futures markets could now receive a boost from participants disillusioned with the equity markets and seeking a viable workaround alternative.
The move also represents a divergence from the original European Commission objective of harmonising financial markets through a pan-European measure; instead, a core member group of countries is pushing ahead with the measures, after strong resistance from member states including the UK and Sweden forced the proposal to be dropped. It also comes after Germany’s Parliament went its own way and tabled separate national measures aimed at clamping down on HFT in the country in January.
“It’s mind boggling how we’ve managed to get to this juncture,” said Healey. “In times of economic stress, national regulators need to be able to tweak the system, but we are in danger of adding another layer of difficulty for the very market participant that we are supposed to protect. The Italian financial transaction tax is hugely complex and risks tying up every individual in a suffocating amount of red tape. It’s a nightmare.”
Earlier this year, Mark Spanbroek, general secretary at the FIA European Principal Traders Association, expressed regret that rising levels of national legislation seemed to be undermining European Commission efforts at standardisation and harmonisation, such as MiFID II.
“It’s a shame that European countries are moving ahead with their own national legislation on market structure, when we have worked so hard on MiFID II,” Spanbroek told Banking Technology. “It’s going to be very hard for the regulator, ESMA, to control the market effectively when there are different rules across Europe.”
Discussions about the introduction of the transaction tax are ongoing among the 11 members that chose to pursue it; the states in agreement are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia. Other more sceptical nations are currently considering terms for joining the scheme; in February, the Netherlands State Secretary for Finance indicated that the country will only participate in the EU financial transaction tax if three conditions are met, including an exemption from the tax for pension funds, a requirement that the FTT and banking tax must not be disproportionate, and that the proceeds of the tax flow back to the member states. The UK is not part of the FTT initiative.