The Magic Roundabout

We've all had those interminable conversations that seem to go in circles, with no end in sight, until both people forget what it was they were discussing in the first place. The financial transaction tax is starting to seem like one of those.

Often referred to as the Tobin tax, after an economist (who has, notably, disavowed the current proposed implementation of his idea), the transaction tax would see a fee levied on securities transactions, differing in percentage depending on where it's being instituted. It's been popularized by campaigns such as the Robin Hood Tax movement, and in the wake of the financial crisis it's become politically savvy to sidle up to. Some countries already have one, such as the UK with its stamp duty, and particular Asian power houses.

Implementation Shortfall
It's unpopular within the industry for various, yet obvious, reasons. Some say that it'll make it too unprofitable to continue with trading certain asset classes, while others say that it'll destroy high-frequency trading, where the margins in individual trades are so small that any subtraction would make the practice unprofitable. Given the distaste that HFT engenders, that's not the most sympathetic argument in halls of power, but the fact is so. One Chicago-based HFT firm I spoke to a few years ago, when the idea of a European financial transaction tax was first mooted, said that they wouldn't necessarily pull out of Europe, but the resulting widened spreads would make them seriously consider what their objectives on the continent were.

Then, of course, there's the problem of regulatory arbitrage, which makes unilateral decisions to impose national levies somewhat perplexing. A currency transaction tax on trades denominated in Euros, for instance, may well be effective, but having it within the confines of a domestic border will lead others to look elsewhere. The technology requirements, as well, aren't necessarily insurmountable (although some will delight in telling you that they are, in fact, impossible without their platforms to help), but will require a rethink of formulae and configuration, meaning yet more investment.

Politicized
The problem with transaction taxes isn't the principle of them, as such. It's the motivation behind them, which as I said earlier, tends to be for political rather than empirical reasons. A Europe-wide tax, for instance, wouldn't actually raise all that much money in the grand scheme of things, although I'm fully aware of the irony inherent in labeling billions of Euros as not "that much money".

A currency transaction tax on trades denominated in Euros, for instance, may well be effective, but having it within the confines of a domestic border will lead others to look elsewhere.

Rather, at a time when the heads of the US regulatory agencies are being summoned to Congress to explain slow progress on Dodd-Frank, and mounting criticism over the absent Markets in Financial Instruments Directive review ratification is damaging MEPs before election season, the implementation of wide-ranging policy such as this needs cool heads, rather than hot ones.