How Financial Transaction Taxes Affect High-Frequency Trading

Summary

The document asks whether a financial transaction tax on equity sales can make high-frequency trading infeasible, using Taiwan as an example where the author associates a stated tax with an apparent lack of HFT. The response argues that the effect depends on how market participants are classified and on exemptions available to designated liquidity providers or market makers.

According to the answer, firms may qualify for exemptions by taking on liquidity-provision roles, allowing them to continue some activity without the tax applying in the same way. The response therefore suggests that ordinary investors and smaller traders may bear more of the tax burden than exempt firms. This is a short, single-response discussion rather than empirical analysis: it does not establish that the tax caused HFT to be absent in Taiwan, quantify behavioral effects, or examine how exemptions are administered across markets. The claim should be treated as an institutional observation, not a general causal result.

Key ideas

• A transaction tax can affect trading differently when some market participants qualify for exemptions.
• Market-maker or liquidity-provider exemptions are described as a way to preserve liquidity provision.
• The answer suggests that firms may adapt their status or activities to receive an exemption.
• The Taiwan example is anecdotal and does not establish that the tax caused HFT to be absent.

Tags

# Does financial transaction tax (FFT) debilitate high frequency trading?


# Does financial transaction tax (FFT) debilitate high frequency trading?












In Taiwan there is a FFT of 0.3% on equity sell, and coincidentally HFT seemed to be non-existent in Taiwan market. HFT features high volumes of trades, does the tax make HFT infeasible?

## Answer by Tom (score 4)

https://quant.stackexchange.com/a/31084

A lot of designated liquidity providers/market maker are exempt from FTT as authorities rightly believe markets would become less liquid without them.

So HFT trading firms just decide to call themselves market makers and do some arbitary liquidity providing role to give them a free pass to carry on with their other strategies tax free.

It is the normal investor, small trader that will feel the pain of a financial transaction tax.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.