Proposed European Transaction Tax Could Spell Doom for High-Frequency Traders

The High-Frequency Trading Leaders Forum 2011 will be discussing the independent research that shows that high-frequency trading has a positive impact on global capital markets by

High-Frequency Trading Leaders Forum 2011

increasing liquidity and reducing price volatility, findings that could allay some of the popular and political concerns over the strategy.

Over in Europe, the outlook on high-frequency trading is not as bright. According to CNBC’s Bob Pisani, several European countries are proposing a financial transaction tax.

Stock-exchange stocks and European banks dropped on European financial transaction tax proposal.

A financial transaction tax — essentially a tax on trading in financial instruments (likely stocks, bonds, and futures) — would likely dramatically reduce trading volumes, particularly for cost-sensitive traders like high frequency traders. It would also likely mean wider spreads for stocks, bonds, and futures.

Financial transaction taxes have been floated and proposed many times in the past. In the U.S., this was floated in the Dodd Frank legislation but was removed because of the negative impact it would have had on trading and liquidity.

It would be even tougher to implement across many jurisidictions in Europe. “The challenge in implementing a transaction tax is that transaction taxes have to be proposed and adopted across many jurisdictions in order to avoid imbalances of activity,” according to one trader.

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