EU Tax on Speed Trading Will Harm Investors – Experts

A proposed tax on financial transactions by European regulators will severely hurt high-frequency traders and ultimately harm all investors and market makers in the process, industry experts tell Advanced Trading.

Late last month, the European Commission proposed a 0.1 percent tax on any stock or bond trade, a move that's aimed squarely at firms whose profits are generated by how fast they can execute trades. Derivatives trades, which are often used by institutional investors as a hedge against swings in commodity and FX prices, would be tagged with a 0.01 percent charge.

"A lot of high-frequency trading is just pure market making. And if you remove market making, you'll find that it will be much more expensive for institutional investors to execute larger orders," says Dmitry Rakhlin, the global head of quantitative trading at AllianceBernstein, a U.S.-based investment management firm majority-owned by Paris-based AXA. Rahklin spoke exclusively with Advanced Trading last week.

Rahklin continues: "This tax clearly doesn't differentiate between the tactics of high-frequency trading and pure market making."

In order for the proposed Tobin tax to become law, all 27 members of the European Union have to unanimously approve it. The tax, which would take effect in 2014, would raise $78 billion a year according to the EU's projections. But industry sources warn that the unintended consequences will be far more costly in the long run, drying up liquidity throughout the market, while lowering returns for the long-focused institutional investors it's supposed to protect.

A similar tax for U.S.-based high-frequency traders was proposed earlier this year by U.S. Sen. Charles Schumer (D-N.Y.). He urged SEC chairman Mary Schapiro in a letter to levy a fee on speed traders in order to cover the cost of building a system that could monitor them in real-time.

That would effectively kill high-frequency trading in the United States, according to Matt Samelson, the principal and equity market analyst at market research firm Woodbine Associates.

"The returns of high-frequency strategies are predicated on small gains and many transactions, and this could effectively wipe that out," warns Samelson.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio