Effects of Taxation on High Frequency Trading

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High frequency trading, often referred to as HFT, is typically described as ultra-high-speed algorithmic computerized trading. However, because of the ever-evolving nature of technology and the markets, it is difficult to determine a precise definition for high frequency trading as said definition could rapidly become obsolete. For the purposes of regulation, the Italian Securities and Exchange Commission defines it as trading at a minimum frequency of a trade every 0.5 seconds.

HISTORY & EVOLUTION OF HIGH FREQUENCY TRADING

BACKGROUND

Although high frequency trading is often equated to algorithmic trading, algorithmic trading was around long before the advent of HFTs. High frequency trading is one of the most visible byproducts of the technological advancements in the market and is indicative of a shift in the markets towards increasingly levels of automated trading. The earliest instances of high frequency trading can be traced back as far as 2000, which was right when a technological renaissance of sorts was occurring in the United States.

HFT has had varying degrees of market adoption. In the study conducted by the Technical Committee of the International Organization of Securities Commission, they observed highly positive correlations between HFT and robust market infrastructures, liquid and transparent markets, particular pricing schemes and small tick sizes. Vary degrees of adoption were also observed across asset classes, mainly depending on the liquidity of the instrument. Equity markets remain the primary stomping grounds for high frequency traders, with HFT also playing a role in the trading of ETFs, derivatives, currencies, and fixed income securities.

High frequency trading came under fire and intense media scru...

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... exchange was mentioned. There are now only about a dozen firms that employ traders on the floor of the New York Stock Exchange, down from hundreds. However, trading activity has skyrocketed from about a thousand quotes per second scrolling on the ticker tape at the height of the technology bubble in 1999, to over two million quotes per second with the majority of this increase being attributable to high frequency trading.

In this paper, we attempt to measure and evaluate the impact that taxation on HFT has on the country’s market structure and economy as a whole, using the Eurozone as the focal point for data collection and analysis.

Works Cited

"Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency - Consultation Report", Technical Committee of the International Organization of Securities Commissions, July 2011

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