A financial transaction tax does not attempt to address the cause of the recent crisis and would be a destabilising action. Not all financial market participants would contribute equally. Different types of investors trade at different frequencies and would therefore be affected differently by the tax. Equity market-makers trade more often than traders of collateralised debt obligations or mortgage derivatives. The latter contributed more to this crisis, yet his proposal would tax the former more.
The liquidity impact from this tax is extremely hard to judge. Liquidity does not respond in a linear fashion and is one of the most difficult aspects of markets to model, although a tax would obviously be very negative. While the illiquid and low trading frequency credit markets (at the heart of the recent trouble) froze last year, the more liquid equity markets had fewer issues clearing and the highly liquid, rapidly trading Group of Seven government bond and forex markets cleared consistently. So the tax would hit the source of the problem the least and directly diminish the liquidity, therefore increasing the risk, in the markets that did continue to function because these markets have a higher average trading turnover.
Read it all from the FT.
David Bebbington: Tobin himself abandoned the idea so why is the EU even debating this tax?
A financial transaction tax does not attempt to address the cause of the recent crisis and would be a destabilising action. Not all financial market participants would contribute equally. Different types of investors trade at different frequencies and would therefore be affected differently by the tax. Equity market-makers trade more often than traders of collateralised debt obligations or mortgage derivatives. The latter contributed more to this crisis, yet his proposal would tax the former more.
The liquidity impact from this tax is extremely hard to judge. Liquidity does not respond in a linear fashion and is one of the most difficult aspects of markets to model, although a tax would obviously be very negative. While the illiquid and low trading frequency credit markets (at the heart of the recent trouble) froze last year, the more liquid equity markets had fewer issues clearing and the highly liquid, rapidly trading Group of Seven government bond and forex markets cleared consistently. So the tax would hit the source of the problem the least and directly diminish the liquidity, therefore increasing the risk, in the markets that did continue to function because these markets have a higher average trading turnover.
Read it all from the FT.