High frequency trading
Although the news stems from the securities market the tendency could become trend-setting within other markets too. Regulators are debating a definition for high frequency trading. Whilst it is well understood that ‘algos’ are a necessary and useful tool in creating liquidity or allowing large trades, rising concern is given to malfunctioning computer models and other abuses distorting prices and disrupting trading. Responding to past abnormalities the CFTC (Commodity Futures Trading Commission) announced a broad review of such trading incidents
Markets. Te Wyman report clearly differentiates between short and long-term instruments. In general the findings were a direct increase of transaction costs for all FX transactions by three to seven times and by 18 times for the most liquid product, the FX swap < 1week maturity! One of those exposed is the most liquid product, a EUR/USD 1 week swap with a notional amount of EUR 25 Mio. Te current transaction cost to the end user is estimated of EUR 279; the additional taxation of such a transaction at 0,01% will impact EUR 2,500 to the dealer but also to another EUR 2,500 to the Financial Institutions counterparty (interbank trading within the EU). Tese costs are estimated to increase dramatically between 9 – 18 times (either single or double taxation). But again, this liquidity tool of up to one week, maturity counts for more than 50% of business transactions.
in the past. For more than a year regulators and exchanges have been looking for ways to regulate automated trading. A trend that no doubt will be followed by our industry and could have massive influence within the FX markets too.
Financial Transaction Tax FTT
FTT though an old story has seen recent substantial development. FTT is (hopefully) no real political issue in the UK and the US, at least for the time being. However, Europe may not be so lucky. On the 28th September 2011, the European Commission unveiled a proposal for the implementation of a FTT as of 1 January 2014. As broadly understood, such a tax would be levied on all securities and derivatives transactions executed in the European Union. Whilst FX Spot is recognized as being exempted, the sister products FX forwards and FX swaps, as well as FX derivatives (Options, NDF’s) will be exposed to taxation. And this is where the tragedy will start once FTT is aimed towards the liquidity tools in the FX markets.
Recently, Oliver Wyman published a study focusing on the impact of a FTT on the Foreign Exchange
Te FTT discussion started back in 1936 by Keynes and saw revived discussion by Tobin from 1972 onwards. With some exceptions, mainly based on the stamp duty model in the securities
markets, this kind of taxation
has however always been paid little attention to by politicians, though the recent financial crisis has dramatically changed this view causing it to become a political hot topic.
Such exigent discussion raises three main questions:
• Is there excessive trading (and in which products) causing markets in short and long to fluctuate excessively?
• Would a small tax hamper destabilizing speculation without reducing liquidity needed by markets?
• Will revenues of a general tax even at low level be substantial relative to the costs of implementation?
Our call to the accountable authorities is for international consistency in regulation and supervision. Tis will be needed for the derivatives market but also when it comes to taxation in financial markets. We are living in a global world.
april 2012 e-FOREX | 21
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