A UK parliamentary committee has called on the government to investigate the viability of imposing a financial transaction tax on the profits made by high frequency traders operating in London markets.
The call to action was made by the House of Commons Business Innovation and Skills Committee in a report on the 2012 Kay Review of UK equity markets.
Professor Kay's review sought to improve long-termism in the market by addressing the incentives rewarding the push by market players for short-term profits.
While the Kay review toyed with the idea of a financial transaction tax to discourage the worst excesses of high frequency traders, the concept was booted into the long grass over concerns about implementing such a poloicy unilaterally.
Written and oral submissions to the Committe from UK asset managers and the Secretary of State found no lack of support for the idea, although any enthusiasm was tempered by the difficulty of identifying which transactions to tax in a fast-moving global marketplace.
MPs on the Committee, however, remain undeterred, stating: "We recommend that the Government considers the viability, benefits and risks of a Financial Transaction Tax on HFT with the objective of changing the behaviour of very short-term investors."
They have called on the government to undertake an impact assessment of the introduction of a tax on equities "at a level which is the average profit made on a high frequency trade in the UK".
The report also suggest commissioning a feasibility study of proposals to ban banks which establish offshore trading subsidiaries in non-OECD territories from trading in the UK. Such a study would include an assessment of whether doing so would counter the arguments against a domestic FTT being ineffective in the global market.
In conclusion, the Committee states: "There is no point in commissioning a review of the industry unless the government is challenged to move forward and make radical changes to align the incentives facing every link in the investment chain. The government has to deliver on the recommendations made by Professor Kay and the issues raised by his analysis."
Christian Voigt, business solutions architect at Fidessa expresses concern at the unintended consequences of any move to levy a tax on HFT, believing the politicos are missing the point.
"The focus on high-frequency trading is not appropriate," he says. "HFT is not a trading strategy but a technology. Therefore, it is much more important to focus on safe and robust IT systems that are properly managed and monitored, as already done by the industry and the regulators. A tax on traders using sophisticated technology would only punish innovation but not improve markets."
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