Market maker role underestimated in FTT plans

European policymakers may have underestimated the role of market makers in drawing up plans for a financial transaction tax, a market structure expert has warned.

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European policymakers may have underestimated the role of market makers in drawing up plans for a financial transaction tax (FTT), a market structure expert has warned.

Christian Voigt, business solutions architect for trading technology vendor Fidessa, wrote in a Thursday blog that the European Commission may have underestimated the importance of market makers in maintaining efficient markets, as it gathers evidence in support of a tax.

In attempting to circumvent apparent “middle men”, as the commission stated in an FTT working document from the Commission released in February, market makers would have less incentive to provide liquidity.

“The text argues that while today [two hypothetical European investors] get matched via a chain of intermediaries, an FTT would significantly reduce the length of that chain fostering more direct matching, and that the anticipated decrease in market volume should not be ‘confused with less efficient markets or an unwarranted squeeze in liquidity’,” he wrote.

“Whether or not you believe that cutting out the middleman (aka market makers) has no detrimental impact on market efficiency and liquidity, the European Commission FTT proposal is consistent in not offering an exemption for market markers,” Voigt wrote in the Fidessa blog, titled 'Confusion reigns over FTT'.

He adds confusion around the role of market makers led the European Parliament to take on the broad array of evidence that supports exemptions for such participants in its amends to the Commission proposal.

Plans for a European FTT were dropped in 2011, as it didn’t have adequate support from all EU member states. Last year, 11 EU member states agreed to a renewed push to establish a levy under the ‘enhanced cooperation’ legislative tool.

The current outline agreed by the Commission in February would tax equity and bond transactions at 0.1% and derivatives at 0.01%, although these levels are expected to change.

The Commission is expected to produce a revised FTT proposal, after initial working group meetings between the 11 member states supporting the tax.

Voigt was previously responsible for business development in the institutional equity markets for German market operator Deutsche Börse and has a doctorate in market microstructures.