February 19, 2013 6:27 pm

All eyes on Italy’s high-frequency rules

Regulators, banks and market makers watch for effects

Italy is set to become a testing ground for the regulation of high-frequency trading as politicians wrestle with the contentious topic.

Over Christmas, Italy introduced a financial transactions tax that went further than a French equivalent last August. Specific legislation was aimed at high-frequency trading in local equities and derivatives – asset classes that have attracted high-frequency traders because they are liquid and traded on exchanges.

The Italians mandated that some trades executed by algorithmic programs would be taxed at a rate of 0.02 per cent on the value of the orders modified or cancelled during a trading day, once above a threshold.

Regulators, banks and electronic market makers are closely watching what the effect will be. Many politicians are seeking controls on the industry’s ability to fire out and cancel thousands of quotes per second automatically. Failing that, they want to increase the tax take from the high-tech traders.

Last week, the European Commission in Brussels unveiled plans to collect a levy on equities and derivatives transactions and estimated it could raise €30bn-€35bn.

While the details are still unclear, this could also hit high-frequency trading.

The financial services industry argues the tax proposals could have a devastating impact and potentially reduce liquidity or the ability to trade.

“What people don’t seem to realise is that the burden of this new tax will fall much more heavily on ordinary investors such as pensioners than intermediaries such as banks and brokers,” says Remco Lenterman, chairman of FIA European Principal Traders Association, referring to the commission’s proposals.

The commission has argued that the overwhelming majority of transactions on financial markets take place “purely between financial institutions”; exemptions would help blunt the impact of the tax on the real economy, it says.

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