A financial transaction tax (FTT) on derivatives trades in Italy could have disastrous effects on the local market, according to experts.
The tax, introduced this week, follows on from Italy’s introduction of an FTT for equity transactions on 1 March this year.
Derivatives will be taxed at varying rates depending on the type and size of the contract. Equity transactions are currently charged at 0.12% for shares traded on a regulated exchange or multilateral trading facilities or 0.22% for trades classed as OTC, such as those executed in broker dark pools.
However, with a growing body of evidence suggesting the tax on equities has severely impacted Italian trading activity, experts have warned that derivatives could be in for a similar fate.
Rebecca Healey, senior analyst at research consultancy TABB Group, said: “We looked at Italian trading volumes over the past fives years and in the past six months since the equities tax was introduced, market share [of total European equity trading] has dropped below 5% for the first time.
“When it comes to derivatives, you need to consider why people trade derivatives, and often its because it they want to avoid some cost to investing in the underlying asset, so it’s possible that once the tax is introduced there might not be any reason to trade some contracts anymore.”
Healey is also doubtful the Italian government will get the kind of tax revenue it is looking for. With trading set to fall as it has in equities, combined with the relatively low level of the tax, she believes it unlikely the government will make significant returns while also dampening any economic recovery and returns for underlying investors.
Remco Lenterman, director of proprietary trading firm IMC and chairman of the FIA European Principal Traders Association, said the tax on derivatives and a further proposed tax on cancelled orders – intended to curb high-frequency trading – is not going to give the Italian government any real benefit.
“Governments like to go after certain market participants with taxes like these, but ultimately the costs will be passed on. This tax with be borne by the market as a whole and ultimately hit the end investor through their pension fund or other investments,” he said.
Politicians and market participants will be watching the reaction to derivatives taxation in Italy closely as a 0.01% tax on derivatives forms part of a broader move by 11 European Union countries to introduce a cross-border FTT.