Are You Afraid of Curtailing The HFT?
In August 2012 France introduced a financial transaction tax (FTT) of 0.2% on transfers of stock ownership together with a tax on domestic high frequency trading. In October of 2012 the EU committed as well to a pan-European FTT. In the US there has been talk of an FTT to curb high frequency trading for several years, without much steam, as well. Proponents of HFT, including HFT firms as well as firms whose business models depend on their success, have harshly criticized any such tax as being a disaster for our capital raising system. Specifically those proponents argue that such a tax would indeed curtail HFT, which would have the effect of wider spreads, lower trading volumes, and less size at the public quotes. These proponents are scared of the death of their business models, and they want you to be scared as well – “be careful what you wish for.”
Admittedly we are unconvinced that an FTT is the correct solution for a complex and opaque market structure, as we believe there are more simple and elegant ways to right many conflicts of interest we currently endure. However, as the French tax has gone into effect, as has one in Italy, we are starting to see studies and observations that would indicate that the markets have nothing to be afraid of should HFT activities be curtailed. In this morning’s note we wish to highlight some observations by A) some academicians at the University of Memphis and B) Morgan Stanley.
A) This University of Memphis study done in February 2013 analyzed markets in French stocks before and after the August 1st 2012 FTT and compared those results to a similar set of Dutch stocks trading under the same exchange/ market structure without the tax. They observed that the tax policy resulted in an immediate temporary decrease in trading volume, as well as no associated deterioration in market quality. Specifically, after the FTT, they observed that spreads did not change, nor did intraday volatility! So much for the “HFT tightens spreads and dampens volatility” arguments. In addition, the professors noted that order flow post-FTT was less aggressive in behavior with longer resting times and fewer cancellations.
B) Morgan Stanley just this month has studied and reported their observations of market quality in the Italian markets after they introduced their own FTT (We won’t link to their report, as it is their property – we encourage you to ask your coverage there for the report.) They have observed that since the Italian FTT was introduced:
– Volumes have dropped, although partially recovered.
– More trading migrated to the lit markets from the dark markets.
– Depth of book increased.
– Average trade size increased.
Does this mean that we should implement an FTT in the United States? That is not what we are advocating at all. In our political system taxes always have a funny way of not curtailing who they are designed to curtail, and end up being born by those who were told initially it will not affect.
What we are suggesting is that despite the efforts of HFT lobbying clowns in Washington DC, and the numerous sponsored “academic research” designed to scare you away from thwarting HFT in any shape or form, facts from real world data and results show that reigning in HFT abroad is not harming their markets, but actually improving them.
Don’t be afraid. To quote tennis great Arthur Ashe:
Fear isn’t an excuse to come to a standstill. It’s the impetus to step up and strike.