The Italian financial transaction tax (FTT) has caused a lull in broker crossing network activity and a rise in trades reported to exchanges and multilateral trading facilities, figures show after a full month of implementation.
London Stock Exchange-owned Borsa Italiana reported trades worth €46.86 billion, a 9.1% drop from February's €51.59 billion, according to Thomson Reuters data - but market participants have put the overall decline in trading activity at around 30%.
Off-exchange Italian equity trades reported to Markit BOAT fell from €18 billion in February to €1 billion in March. The steep decline is explained by several of the broker crossing networks (BCNs) which normally report to BOAT conducting trades on a negotiated basis and reporting to the primary exchange to avoid the higher rate FTT. For 26 March, €4.35 million of Italian equity trades were reported to BOAT, compared to €107.2 million for 26 February.
The Italian FTT taxes equity trades on exchanges and multilateral trading facilities (MTFs) at 0.12%, dropping down to 0.1% from 2014, and those on BCNs at 0.22%, which will change to 0.2% from 2014. One solution brokers have devised to continue matching participants in their BCNs was to execute 'off-market, on-exchange', whereby participants agree the terms of a trade in a dark pool, then execute and report on an exchange or MTF.
"Since the tax was implemented we've seen trades reported to BOAT decrease and trades reported to the exchange increase, with BATS Chi-X Europe also capturing an increase in reported trades," said a senior sell-side source, adding that market participants were affected in different ways, with some liquidity providers reducing trading in response to the tax.
"The tax will not have an impact on asset managers or pension funds, and high-frequency trading firms have an exemption from being net-zero at the end of the day, but statistical arbitrage firms now have less activity in Italian stocks, which has widened spreads and reduced liquidity," he said.
A number of market participants have noted that macro factors such as the fall out from February's national elections and the effects of Cyprus' economic struggles have also had a significant impact on trends in the Italian equities markets.
Bond markets beware
While concern about the impact of the Italian FTT continue, plans for a pan-European tax continue to encounter problems. Presently, 11 EU member states support a pan-European tax, which would hit equity, bond and derivatives transactions.
Today, a report measuring the impact a tax would have on UK sovereign and corporate bonds was published by the City of London Corporation, which put the cost of the FTT at £4 billion.
The report follows a call by the UK's House of Lords' EU Committee for the government to apply legal pressure to force Brussels to revise the tax's extraterritorial impacts. In a letter sent to financial markets minister Greg Clark last week, the Committee complained of failures in the scrutiny process in relation to the EU FTT proposal and called for the minister to seek greater legal advice on the tax, which the Committee suggested may infringe the rights of non-participating member states.
Rebecca Healey, senior analyst at financial consultancy TABB Group, who provided written evidence to the EU Committee, says the tax will damage the interests of investors.
"Policymakers are taking into account explicit costs of the tax, but not the implicit costs, and ultimately it will make trading in Europe less attractive, reduce overall liquidity and hit end-investors," Healey told theTRADEnews.com, adding that the effect on fixed income products could be significant.
"Not having a fully functioning secondary market will affect sovereign bonds and the debt management offices of European countries as some will find it difficult to raise money in the secondary market," she said.
A draft of the proposed EU FTT was agreed upon by the European Commission in February and is progressing through legislative channels via the 'enhanced cooperation' mechanism, which lets a bloc of at least nine states go ahead with a law if the Commission is in favour.
Market participants have warned the current aims of the tax are too broad, and will unfairly tax market participants outside of supporting euro-zone states.