Implementing a UK financial transaction tax (FTT) on high-frequency trading (HFT) would be almost impossible, according to industry experts.
The House of Commons Business, Innovation & Skills Committee today published its recommendations to the UK government following the 2012 Kay Review, and suggested it should examine the possible implementation of a tax on HFT transactions in equities.
The report said such a move could help reduce some of the negative impacts HFT can have on markets, claiming it is correlated to share price volatility. The committee also questioned arguments that it provided markets with liquidity.
However, UK buy-side trade body the Investment Management Association (IMA) has questioned the wisdom of using taxation to control market participants.
Jorge Morley-Smith, director of tax at the IMA, said: "Tax is a very blunt instrument to use to try and control what is ultimately a fairly small sub-set of the market."
While asset managers have often been concerned about the impact of HFT, Christian Voigt, business solutions architect at Fidessa, suggested that fears are often unfounded, because government and the industry already focus their efforts on safe and robust IT systems that are properly managed and monitored.
"How do you really define HFT? It's not tied to a particular type of investor or trading strategy as it's ultimately just a trading technology," he explained.
Morley-Smith also believes that it is difficult to build a working definition of an HFT business that would not disadvantage asset managers.
He said: "We've seen a lot of proposals across Europe about ways of stopping HFT, but the definitions are always so broad that they would capture everything. I'm not sure you can define HFT in such a way that it won't impact a very large number of market participants."
If an FTT were levied on HFT trades it would negatively impact market liquidity, according to Voigt.
"While the buy-side might gain some small benefits from an FTT, it would also force some market makers out and reduce the liquidity available which would far outweigh any positive effects," he added.
Even the committee itself was dubious about whether implementing a tax focused on high-frequency activity would be possible, though it did largely agree that HFT had a negative impact on the market.
Earlier this year, a German HFT law was adopted, which mandates exchanges to set order-to-trade ratios and minimum tick sizes, and requires HFT firms to register with national markets regulator.