According to Financial News’ Joe Morgan, the European Parliament earlier this month voted in favour of using a tax on financial transactions to raise revenues for future European Union budgets. The tax, sometimes known as a Robin Hood tax, would apply to a wide range of transactions and be set as a 0.01% to 0.05% levy on every financial transaction.
The European Commission, the executive arm of the European Union, is also expected to publish its views on the tax imminently. A FTT has been proposed by critics of high-frequency trading firms, as many regulators and market-watchers believe they create instability in the financial markets and exploit lay investors.
High-frequency trading firms deploy super-fast and highly sophisticated trading strategies in order to seek out pricing inefficiencies across multiple trading platforms. The strategies rely on completing hundreds of thousands of transactions in as short space of time, meaning a tax imposed on each transaction would dramatically increase high-frequency trading firms’ cost base.
But while the tax will impact certain types of high speed trading strategies, trading specialists say that sophisticated high-frequency trading firms will be able to adapt to any such tax. Hirander Misra, chief executive officer and co-founder of Algo Technologies, a low latency connectivity provider based in London and New York, said the proposed FTT could accelerate one trend where some high-frequency trading firms have moved away from using speed-based strategies to seek out arbitrage opportunities across trading platforms.
Instead, sophisticated high-frequency trading firms will be encouraged to execute cross-asset class trading strategies, exploiting complex correlations between different asset classes, he said. “In these markets it’s all about adaptability. Firms capitalise on new regulatory or market structures,” he said. “Strategies will develop to work within the confines of the rules so the tax does not apply. Rather than an emphasis on micro-second trading, the focus could shift towards more predictability and a slightly longer time horizon, in which securities are held longer,” said Misra.
Kevin Neville, head of securities finance and prime services at Rule Financial, a financial technology consultancy firm, said high-frequency trading volumes would fall dramatically as a result of an FTT. But he added that high-frequency trading firms are likely to respond by adopting strategies with a longer investment horizon. He said: “high-frequency trading firms would sit on the sidelines a lot more and more aggressively target bigger market swings to make strategies profitable,” he said.
Benoit Raimond, a speed trader and chief executive officer of Raimond Capital, a London-based fund manager, believes that high-frequency trading firms that provide liquidity to markets would continue to make about the same margins under a FTT regime. However, the broader market-wide drop in volumes that would result from an FTT would likely hit their overall revenues.
A senior trading technology industry specialist, who asked not to be named, said the imposition of an FTT would “do little” to reduce the risks of high-frequency trading while widening spreads and possibly increasing levels of systemic risk. “Speed traders will still make money but will have to use other probably more risky or expensive strategies for the end investor,” he said.