Following the 2008 financial sector collapse, Europeans have been slowly moving, somewhat in concert, towards new financial transactions taxes. Last week, France jumped the gun: it initiated a package of financial transaction taxes all on its own that includes a novel tax on high frequency stock orders.
The high frequency tax applies to traders that (1) use computer algorithms to determine the price, quantity, and timing of their orders (2) use a device to process these orders automatically, and (3) transmit, modify, or cancel their orders within half a second (the half a second has been set by draft administrative guidance). The high frequency tax is .01% on the amount of stock orders modified or cancelled that exceeds 80% of all orders transmitted in a month (under the draft administrative guidance). In effect, France now may tax orders that are not filled. It has created a “non-transaction” tax.
France’s high frequency tax would effectively limit a variety of “layering” techniques, which high frequency traders sometimes use to manipulate the market. For instance, traders may enter multiple fictitious orders to drive a stock price up or down, and then cancel their orders.
Because the high frequency tax targets activities that may harm markets, but leaves other activities untaxed, the levy is more focused than a conventional financial transactions tax. However, it taxes only some trading activities but not others, such as fat fingers or momentum trading, which might be viewed as harmful. Also, the new high frequency tax applies only to operations in France (conducted through a permanent establishment or a subsidiary), and few high frequency traders operate in France. More thought on the scope and the application of a high frequency tax might be worthwhile.
France also adopted a more conventional financial transactions tax, at a rate of .20%, which is higher than the .10% recommended by the European Commission to the EU (and the .03% proposed by Harkin/DeFazio in the U.S.). However, the French transactions tax is much narrower than other proposed financial transaction taxes: the French tax applies only to stock in large capitalized French companies, and not to bonds or derivatives (other than certain credit default swaps on sovereign debt). France was eager to move a financial transactions tax forward, but not at the price of losing its entire financial sector.
For an earlier blog on financial services taxes and background material from our panel discussion on these taxes, click here.