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September 11, 2013

Europe's Financial Transactions Tax Unlikely to Hurt Professional Traders

By Osmo Timonen

Guest columnist Osmo Timonen, a proprietary futures trader at Futex in London, discusses how any Europe-wide financial transactions tax might not impact the professional trading community.

The European Commission proposed a EU-wide Financial Transactions Tax in September 2011. The aim of the tax is to make sure that the financial sector contributes to solving the Euro crisis and to prevent fragmentation of financial regulation in Europe. The fragmentation is a real threat as some EU member states have already invoked a transactions tax while others firmly oppose the idea. Also, the tax aims to discourage "financial transactions which do not contribute to the efficiency of financial markets or of the real economy." What such transactions are is not defined in the European Commission's proposal, but professional trading could well be at the cross-hairs of the tax.

Osmo Timonen

Professional futures traders and market makers have watched the political maneuvering around the tax proposal with concern. A significant bloc of countries within the EU supports the idea, and at this point it looks likely that some sort of financial transactions tax will eventually be implemented. In its current form, the tax would be collected from institutions, and brokers and banks would pass the costs on to their customers who make the transactions. In essence, this would mean higher transactions costs for all traders who trade European products.

For derivatives transactions, the tax is planned to be 0.01 percent of the contract value. With many European futures contracts having the notional value of 100 000 euros, a trader entering and exiting a one lot position would be charged an additional 20 euros tax in commissions. That would put many market makers and proprietary traders out of business as high-volume traders currently enjoy commissions of often less than one euro per futures contract.

Market makers create the liquidity that real money investors need when entering and exiting trades. They take the risk of keeping bids and offers available and represent a vital part of a well-functioning market. The obvious importance of liquidity creators has been understood in Brussels, and the tax proposal is most likely going to exclude day traders and designated market makers. A somewhat similar solution has already been implemented in France and Italy where a financial transaction tax is in place.

Who then is going to be charged and who is to be taxed to 'discourage transactions that do not contribute to the efficiency of financial markets'? It seems likely that the bill is going to be picked by institutions and individuals who do not practice day trading. The situation is evolving and nothing is certain at this point. The European Commission had initially planned to launch the tax as early as January 2014, but it has now admitted that the deadline is unrealistic. The tax faces a solid resistance from the financial industry. Also, the UK has challenged the legality of the proposal. The most recent turn has been that a group of European countries has decided to push forward on their own, hoping that other countries will hop on the wagon later. Proprietary traders and market makers have a bit more political drama to watch for the coming months.    


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