This month, the Ministry of Strategy and Finance of Korea announced it was changing the tax rules for financial transactions, with new taxes on options and futures of the Korea Composite Stock Price 200 Index set to be introduced in 2016. A tax on futures on the index is set at 0.001% of the transaction value, while a tax on options is set at 0.01% of the premium for the option, with both effective from the 1st of January, 2016.
Lionel Ghouila-Houri, head of high frequency sales APAC at Newedge, said he did not believe high frequency trading (HFT) was the intended target of the new tax, but HFT would nonetheless be hit “first and foremost”.
“It will be very effective, if the idea actually was to slow down HFT growth. It will impact all investors but HFT firms first and foremost,” said Ghouila-Houri. “Many high frequency traders will probably withdraw from the market, so we will see substantial reduction in liquidity.”
Ghouila-Houri believed Korea’s tax rules were probably not sponsored by the country’s regulator but instead were driven by lawmakers, given the impact they will have on liquidity. Rather than targeting HFT he believed that the tax was motivated both by the desire to raise more money for the government, and secondly in part by some of the difficulties in the Korean equity-linked warrants market last year, where there was concern retail investors were at a disadvantage. He said given the unusually large size of retail involvement in the market in Korea this made it quite a Korea-specific issue.
There has been some speculation that volumes in equity derivatives in Korea could be reduced by as much as 50%. Ghouila-Houri said he believed this was possible, and that it could even be higher if the exit from the market was strong.
“There will be other markets in Asia that are more attractive,” he said, citing Japan, Hong Kong and mainland China as examples, noting for example Japan’s exchange mergers could help drive more electronic trading, while Hong Kong has been developing infrastructure.
“Liquidity is key for any financial market. No liquidity means a more volatile market; so trading that market will be risker. Plus overall, there will be an increase of costs. You have economy of scale when there are large volumes on a market, because clearing firms can charge less,” said Ghouila-Houri.
For Ghouila-Houri, whilst there had been an increase in regulation post-crisis and there was some concern among regulators surrounding HFT, he believed it was unlikely other Asian regulators would pursue a similar method to deliberately reduce HFT. “Regulators in Asia nowadays have a very good understanding of high frequency trading. They are aware of the benefits. They need liquidity,” he said.
However, Ghouila-Houri commented that regulators were worried about a loss of control of the markets. He added the ideal solution was likely to develop some robust and specific filters under the exclusive control of brokers or market centers, mandated by regulators. He also said regulations must be as specific as possible, otherwise there was a danger of a “race to the bottom” as some trading firms tried to avoid as much control as possible to increase speed.
Ghouila-Houri also urged regulators across Asia to make rules consistent across jurisdictions, because the current system of many and varied systems is confusing and unsustainable.