Comment posted in response to City attacks ‘flawed’ EC analysis of transaction tax merits (Daily Telegraph website, 13 Feb 2012)
There is no contradiction – as alleged by today’s letter from financial sector representatives – between the European Commission’s general position on the benefits of derivatives and Commissioner Semeta’s arguments supporting the financial transaction tax (FTT) in the Telegraph on Friday.
In using the term “socially useless” activity, Commissioner Semeta was not referring to derivatives in general and there is nothing in his article that could justify that reading.
Rather, he was alluding to certain types of activity, such as some automated High Frequency Trading, that redistribute rents instead of creating value. This type of activity offers no positive contribution to the rest of the economy and arguably played a part in bringing about the financial crisis.
Lord Turner, of course, famously made a similar point.
With regard to the figure of 90% decrease in trading of some derivatives, this does not refer to those markets being wiped out. Rather, it means as a consequence of FTT, volumes traded will fall more in line with what the real economy really needs.
For example, in High Frequency Trading, instead of a computer being programmed to buy and sell the same product 100 times a second, it might be re-programmed to do it 10 times a second. That would help to consolidate markets, and bring capital and assets more in line with the actual needs of the real economy.An EU FTT could contribute to less volatility in the financial markets and a better alignment between the pricing of assets and their underlying value. This, in turn, could impact positively on the economy as a whole.
An EU FTT could contribute to less volatility in the financial markets and a better alignment between the pricing of assets and their underlying value. This, in turn, could impact positively on the economy as a whole.
European Commission London Office
Original article by Commissioner Semeta
Response by financial sector representatives