A new transaction tax proposal aimed at easing concerns over financial distress in Europe could help U.S. exchanges but hurt high frequency traders.
Among a broad range of proposals announced today by the premiers of France and Germany is a potential transaction tax on the financial markets. According to a research note by analysts at Keefe, Bruyette & Woods, the tax could come as soon as September.
"We assume that the Eurozone members would want to get the United Kingdom on board with this at least in order to avoid regulatory arbitrage," the note said.
If the tax is levied only in the Eurozone, it could be a boon for U.K.-listed stocks. KBW wrote that leaving out the U.K. would create regulatory arbitrage opportunities driving business to futures and equities exchanges in the U.K. at the expense of those in Europe.
For example, Intercontinental Exchange’s European business is U.K.-based and NYSE Euronext’s LIFFE business is also U.K.-based. Therefore if a transaction tax is imposed only in the common euro currency countries, then this could impact cash equities volume in NYSE’s cash business to the tune of 15 to 20 percent of earnings and about 5 to 7 percent of Nasdaq’s earnings.
If a tax is levied in both the U.K. and Eurozone countries then a transaction tax would have implications for trading revenue that makes up an estimated 40 to 50 percent of NYSE Euronext’s earnings, 50 to 60 percent of ICE’s and 5 to 7 percent of Nasdaq’s.
"It could then create a regulatory arbitrage opportunity for customers to switch their risk management and trading to the U.S., should the U.S. not support a tax," the analysts wrote.
KBW analysts also wrote that businesses, such as NYSE Euronext and Nasdaq, who have a high degree of HFT exposure and derive profits from their trading, could be hurt.
"We think a transaction tax would quickly drive HFTs to exit or shrink market participation," KBW wrote.
