Confusion reigns over FTT

I had the pleasure of attending the Sixth Erasmus Liquidity Conference in Rotterdam earlier this week. As well as presenting the first Fidessa Doctoral Student Award for outstanding research to Rémy Praz, I also participated in some very interesting discussions between regulators, academics and practitioners.

In one of the sessions the EU’s Financial Transaction Tax and its impact on electronic trading was hotly debated. Reference was made to a controversial document by the European Commission (EC) which seems to argue that the reduction in market making activity and the lower trading volumes caused by a FTT would not make markets less efficient. The authors invite us to consider the case of a Belgian and a French private client sending an agency order to their respective house banks in the same stock but in opposite directions. The text argues that while today those two investors get matched via a chain of intermediaries, a FTT would significantly reduce the length of that chain fostering more direct matching, and that the anticipated decrease in market volume should not be “confused with less efficient markets or an unwarranted squeeze in liquidity”.

Whether or not you believe that cutting out the middleman (aka market makers) has no detrimental impact on market efficiency and liquidity, the EC FTT proposal is consistent in not offering an exemption for market markers. Interestingly, in its amendments, the European Parliament (EP) does propose to exempt some market makers. I wonder whether the EP (like me) got confused by the EC argument and took on board the overwhelmingly positive evidence in favour of market making?

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