The most likely affect of a financial transaction tax (FTT) in Europe would be higher buy-side trading costs – that’s what respondents to TheTRADEnews.com’s October poll believe.
Last month’s poll concerned European Commission proposals for a tax which could cost the industry about €57 billion a year. The tax would be levied on all transactions of financial instruments between financial institutions when at least one party was located in the European Union . The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts at a rate of 0.01%.
Almost half those responding (45%) to the poll fear a pan-European ‘Tobin tax’ – named after American Nobel laureate James Tobin, who first floated the idea – will raise costs even further for the end-user.
The possibility of a euro-zone-only transaction tax increased today when German finance minister Wolfgan Schäuble was reported as saying that UK opposition to an EU-wide tax should not stop Europe from moving forward with the proposal.
Richard Perrott, analyst at Berenberg Bank, an independent German private bank, agrees. “These types of charges – transaction taxes, stamp duty, and the like – will always be passed on to the end-user,” he said. “It’s no surprise buy-siders already see costs rising if the transaction tax becomes a reality.”
Perrott thinks the idea of a financial tax raising revenues for the EU lacks “intellectual justification” and warns of its impact on volumes. “The size of the proposed tax revenues is hopelessly optimistic and would cause a large contraction in trading activity” he said.
Indeed, 23% of respondents to the poll believed the transaction tax would lead to weaker economic growth.
Brian Mitchell, head of business development at independent brokerage United First Partners (UFP) and a former head of trading at Baring Asset Management, points out that with many banks focusing on Tier 1 capital requirements, scaling back their prop trading and potentially reducing the amount of equity trading they engage in, the tax may not raise as much as first thought.
Additionally, since institutional equity trading volumes have fallen well short of expectations over the last couple of years, it is possible a transaction tax could sink them even further, with a knock-on impact on economic growth.
But while almost a third – 31% of respondents – believe the potential new tax would perform one of its stated objectives – reducing speculative trading – Perrott is unconvinced.
“If by speculation we mean high frequency trading (HFT), then yes I’d agree. But if we are really getting at price volatility, then that’s much less clear,” he said, noting that speculative trading is rife in most housing markets, even when there are high taxes associated with transactions.
Mitchell thinks high-frequency traders may find ways to price the impact of the tax into their strategies, potentially by finding an optimal trade size that is fractionally larger than the small orders they trade now.
For now, the Tobin tax is still a dark cloud, looming over the horizon. But buy-siders fear that if and when it finally arrives, it will be they who are caught in the downpour.