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FTTs and ET – a dangerous combination

There has been a lot of talk recently about the introduction of Financial Transaction Taxes (FTTs). This has even extended to speculation here in the UK that we should tax those naughty HFT practitioners too. Seemingly everyone has a view on this and whether such taxes actually punish the banking community or the end investor. But the real point is that such taxes just won’t work, at least not in Europe anyway. Take Italy, for example, which introduced its own FTT in March of this year. The chart below shows total volume traded and reported to Borsa Italiana. As you can see volume slumped pretty dramatically after the introduction of the tax.

But closer analysis shows that much of the volume that “disappeared” actually just popped up again as OTC reported volume on the LSE. This is because of a quirk in LSE reporting rules that allows OTC trades to be reported as ‘on exchange’ and therefore attract a lower tax levy.

So that’s just one country. Now imagine under MiFID II the situation where we have a pan-European FTT mandate that is then separately interpreted and enforced by each country. Then layer on the spectre of ET (extraterritoriality) working between all the different rule books of the 30 or so venues in Europe that can trade the same universe of stocks. Confused? Well it’s going to be even worse than that because we still don’t have a consolidated tape that provides a standard lexicon for all the different trade types within these rule books. And finally, just to get your head really spinning, zoom out to get a global view that includes trading by non-European domiciled firms too.

ET is here to stay, maybe it’s FTT that should be phoning home.

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