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Sancho Panza

Italy 'killing Its Capital Markets' With Hft Tax

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http://www.risk.net/operational-risk-and-regulation/news/2292170/italy-killing-its-capital-markets-with-hft-tax

'Tax on high-frequency trading and equity derivatives introduced in Italy

A tax imposed in Italy yesterday on high-frequency trading and equity derivatives has been described by one industry expert as extremely damaging to the country's capital markets.

"In the same way as earlier in the year all the trading volumes of Italian stocks dropped by one third, there will be further reductions in volumes," says Pajor. "We can say that Italy is killing its capital markets."

Those looking for genuine hedging opportunities will try to do this elsewhere and not in Italy

High-frequency traders in Italy now face a tax of 0.02% on all order changes and cancellations that occur within a time frame shorter than 500ms, once above a threshold. Equity derivatives, meanwhile, face fixed charges depending on the type of contract. Market makers are exempt from the tax.

However, Massimiliano Caporin, professor of econometrics at the University of Padova in Italy, says the impact will be minimal.

"I don't think there will be a great effect in Italy. There are few orders that are placed by algorithmic traders, because the Italian market is quite small. I don't think there would be a big market reaction."

Caporin adds that algorithmic traders might also find ways around the taxation scheme.

"If I put myself in the place of an algorithmic trader, I might program my code in such a way that it cancels for the possible effect of taxation, so it detects if some trades are now becoming less profitable than others because of the tax," he says.

The tax will also only impact the speculative activities of computer traders rather than human traders, according to Caporin.'

Edited by Sancho Panza

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High-frequency traders in Italy now face a tax of 0.02% on all order changes and cancellations that occur within a time frame shorter than 500ms, once above a threshold. Equity derivatives, meanwhile, face fixed charges depending on the type of contract. Market makers are exempt from the tax.

However, Massimiliano Caporin, professor of econometrics at the University of Padova in Italy, says the impact will be minimal.

"I don't think there will be a great effect in Italy. There are few orders that are placed by algorithmic traders, because the Italian market is quite small. I don't think there would be a big market reaction."

I'm a bit torn on this. To a large extent, the proposals to limit HFT are largely driven by market makers and large institutions that want to protect their profit margins - so I'm a bit suspicious of the EU proposals overall.

However, unless I'm missing something, this tax doesn't look too bad – it's on changes and cancellations which are the consequence of what amounts to ticker spam. Basically they are cancellations of fake trades designed to, in effect, phish for orders. If HFT is not simply front-running large trades, then HFT operators shouldn't really object. I suspect, however, that a lot of cancellations will start happening 501ms after the original order and the sequence of the fake bids and offers will change to suit.

As the changes favour those not using the full gamut of HFT tricks, it makes the Italian market look more attractive. It will be interesting to see if some players move in because the tax is designed to put off HFT activity, or whether they've been crying wolf all along.

Edited by Spork of Damocles

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http://www.risk.net/operational-risk-and-regulation/news/2292170/italy-killing-its-capital-markets-with-hft-tax

'Tax on high-frequency trading and equity derivatives introduced in Italy

A tax imposed in Italy yesterday on high-frequency trading and equity derivatives has been described by one industry expert as extremely damaging to the country's capital markets.

"In the same way as earlier in the year all the trading volumes of Italian stocks dropped by one third, there will be further reductions in volumes," says Pajor. "We can say that Italy is killing its capital markets."

Those looking for genuine hedging opportunities will try to do this elsewhere and not in Italy

High-frequency traders in Italy now face a tax of 0.02% on all order changes and cancellations that occur within a time frame shorter than 500ms, once above a threshold. Equity derivatives, meanwhile, face fixed charges depending on the type of contract. Market makers are exempt from the tax.

However, Massimiliano Caporin, professor of econometrics at the University of Padova in Italy, says the impact will be minimal.

"I don't think there will be a great effect in Italy. There are few orders that are placed by algorithmic traders, because the Italian market is quite small. I don't think there would be a big market reaction."

Caporin adds that algorithmic traders might also find ways around the taxation scheme.

"If I put myself in the place of an algorithmic trader, I might program my code in such a way that it cancels for the possible effect of taxation, so it detects if some trades are now becoming less profitable than others because of the tax," he says.

The tax will also only impact the speculative activities of computer traders rather than human traders, according to Caporin.'

Gamblers have to pay a gaming tax so why is this any different?

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