Nearly four years after Zero Hedge first suggested an HFT tax should punish algos that "churned" quotes and blasted empty bids and offers to stimulate "momentum ignition [11]" strategies, and generally corrupt market structure in a way that lead to both the flash crash, the BATS IPO farce, the FaceBook IPO debacle and the Nasdaq 3 hour crash, the first such tax is now a reality. And while it is not, and likely never will be implemented in a major (if declining) exchange such as the NYSE or Nasdaq, the first country to finally put an end to millions of parasitic empty quotes is Italy.
From the FT [12]:
Italy will on Monday become the first country to introduce a tax on high-frequency trading in a move that has become a test case for potential further crackdowns on the controversial practice.
The country will introduce levies against high-speed trading and equity derivatives in the final part of a two-stage process established this year to tax equity-related transactions.
The Italian version explicitly focuses on high-frequency trading and derivatives, which are often used by corporations and banks to hedge against risk. The tax will also apply regardless of where the transaction is executed, or the country of residence of the counterparty.
The conventional fallback excuse is already in play: liquidity will be damaged. Maybe, it remains to be seen. What will remain, however, is a far stronger orderbook, one which doesn't disappear on a dime, and one which doesn't lead to wholesale market shutdowns as the now infamous Nasdaq closure from two weeks ago.
Banks and brokers – many of whom were scrambling on Friday for clarification of key details – have warned the new taxes could further damage liquidity in the Italian market. Volumes have fallen sharply since the introduction of a tax on equities in March.
Specifically, the tax implementation will look as follows:
For high-frequency traders, order changes and cancellations will be taxed at 0.02 per cent when they occur within a timeframe shorter than half a second, once above a threshold. There will be fixed charges for equity derivatives, depending on the type of contract, and deals executed off-exchange will subject to a higher tax band.
There are of course those who have paid into the system handsomely enough to be exempt:
Intermediaries such as market makers are exempt from the tax.
And with this loophole, the scramble to reclassify all HFT traders as market makers begins.
So while the saying "better late than never" may be applicable, we are confident that when speaking in trivial cliches "too little too late" is far more appropriate.
[13]