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Great Britain Considers Implementing a High-Frequency Trading Tax

Jul 29 2013

Back in March Germany voted yes on the draft of the so-called HFT Act (“Act for the Prevention of Risks and the Abuse of High Frequency Trading”, or “Entwurf eines Gesetzes zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel” in German) – a legislative piece that outlined licensing requirements and rules for high-frequency trading in the country. 

Then in June the Australian Securities Investment Commission (ASIC) came up with new, stricter rules on HFT as well, and it seems that Great Britain is now ready to follow the example of Germany and Australia, bringing things a step further and implementing an HFT transaction tax. 
The House of Commons Business, Innovation and Skills Committee has just published a 500-page report called “The Kay Review of UK Equity Markets and Long–Term Decision Making” after prof. John Kay, a senior economist who researched the topic. 
Among other things, the report explores the possibility of imposing a financial transaction tax on FTT in order to enhance market regulation.
"The practice of High Frequency Trading (HFT) and the fact that shares are now traded and held for a matter of milliseconds epitomises the challenges faced in regulating the market. […] We recommend that the Government considers the viability, benefits and risks of a Financial Transaction Tax on HFT with the objective of changing the behaviour of very short-term investors,” says the report. 
According to the Business, Innovation and Skills Committee and prof. Key HFT often serves as an example of the damaging impact technological progress can have on the economy, and quotes Bank of England's opinion that HFT can contribute to excessive volatility, and therefore the welfare of high-frequency trading remain unclear. This conclusion is backed up by a report drafted by the Government Office for Science, pinpointing occasions on which HFT had caused crashes in the past; this is followed by the recommendation that the British government should employ tax incentives to maximize global welfare rather than the personal welfare of individuals and companies acquiring gains through HFT. 
Considering both the negative and the positive implications of HFT,  the Business, Innovation and Skills Committee comes to the conclusion that “European authorities, working together, and with financial practitioners and academics, should assess (using evidence-based analysis) and introduce mechanisms for managing and modifying the potential adverse side-effects of Computer based 
Trading (CBT) and HFT”.
What's interesting to note here is that the Committee doesn't see that HFT tax as a source of raising revenue but rather as an instrument of influencing behavior. “If we could have a financial transactions tax that worked, it would seem to me to be a very attractive way of discouraging that trading activity in favour of long-term investment,” says prof. Kay on the matter. 
One major problem that the government may face implementing such a levy could be the fact that it is structuring a financial transaction tax that works – and as a proof of this I'd like to point out the wave of criticism that the so-called Tobin Tax, a financial transaction tax voted in by eleven EU countries, received. The Tobin tax, albeit looking good on paper, has been implemented in different countries only to fail miserably. Add to that the fact that is extremely hard to impose a tax on a partial basis in a global market, and the idea of a successful implementation of a HFT tax seems less and less realistic.   
Obviously, the  Business, Innovation and Skills Committee and the British government in general still have a lot of details to figure out before they start levying HFT transactions, however it's obvious that a spotlight has been put on the issue so we will be looking forward to future developments. 
TAGS: UK  Great Britain  financial transaction tax  FTT  Tobin Tax  high frequency trading  HFT 
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