High Frequency Trading Tax Debate

16 October, AtoZForex.com, Lagos – Another aspect of financial markets operations is taking center stage in the US presidential election campaigns, as Hillary Clinton seeks to impose tax on high-frequency trading. The presidential candidate opines that: “high frequency trading unnecessarily burdened our markets and enabled unfair and abusive trading strategies that often capitalize on a ‘two-tiered’ market structure with obsolete rules”.

HFT and US election bid

Hillary Clinton is aiming at one of the most notable features of modern trading: “the seemingly inexorable rise in the number of messages that are sent around the financial system.” It is a consequence of both increasing automation of trading and fragmentation of markets into smaller venues. Clinton is laying particular attention on the aspect of strategies involving excessive levels of order cancellations which makes financial markets less stable.

Challenges to such a bid

This is not the first time government officials or academics will have such an idea. But it has been vehemently discouraged by market practitioners for years. Why? Because the ripple effect of such taxes paid on associated trades among financial intermediaries will be passed on to traders. This will result in widening of spreads on trades, other increases as the burden will eventually be borne by markets.

These challenges are partly why Europe has been trying for four years to no avail to create a framework for a wider, coordinated transactions tax. For many years, it has even been a challenge for US and European regulators to define HFT. European legislation has at least three different definitions.

What does high frequency trading tax mean?

Some countries around the world operate financial transactions taxes, mostly levied directly on the profits that investors make on equity trading activities. Mrs Clinton’s proposal will add to many steps taken by academics and policy-makers in a bid to clamp down on what they see as “excessive speculation”.

High frequency trading came under renewed scepticism recently after former wall street trader Michael Lewis chronicled what he described as unfair market practices in his book, flash boys.

Tax revenues without disturbing normal market activities may sound like a solution for policy-makers, but the question remains how can this be achieved? Also, will the majority of wall street  support Hillary Clinton’s bid?

Can you imagine the consequence of the high frequency trading tax?

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