The EU seems determined to regulate itself into permanent economic decline with poorly thought out policies like the euro currency, Germany's closure of all nuclear power plants,UK's impending closure of numerous coal plants and EU reliance on unreliable wind farm energy that shuts down when the wind dies down. The latest move on the road to regulatory suicide is the planned introduction of Financial Transaction Tax, FTT,by many members of the Eurozone. See Wider euro ‘Tobin tax’ will net €35bn - FT.com
This tax could only work efficiently if the entire world accepted it. But some countries will always try to gain advantage by trading FTT tax free in the securities of the countries levying the tax. This could lead to large transfers of trading activities out of the EU into the US,Canada,Hong Kong and Singapore.
The EU countries will probably respond in a regulatory arms race by imposing penalties on their own issuers of securities for uncollected taxes. This would restrict trading of those securities to countries collecting the tax,causing substantial financial liquidity problems. The tax would also put an end to frequent trading in the market for very short term loans between governments, financial institutions and big corporates and would shut down computerised high frequency trading,HFT.As a result, financial traders and insider fixers would demand much higher spreads between bid and ask in compensation for holding inventories of securities in market making.
Before computerised trading became big,market making traders often took spreads of roughly 20% in shares of companies in their inventories other than the actively traded small group of blue chips. A big institutional investor that wanted to make a major investment buy,say 1% of the shares of a company, would find that its own big buying power would drive up the price of the shares. So it would break up the buy order into a series of trades to prevent the share price from soaring but by the time the trades were completed,the price paid for the shares could still average 20% higher than the initial starting price. In selling 1% of the shares,the market price would fall about 20%,so a round trip of buying and selling a share could prove very expensive at 40%. These trading costs make a good case for allowing HFT to continue without FTT tax.
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