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Financial Transaction Tax for Europe?

Stock-exchange stocks, European banks drop on European financial transaction tax proposal.

NYSE Euronext down 8, Nasdaq down 1 percent (but well off its lows).

"This is a priority for us," France's Nicolas Sarkozy said in his press conference.

What does he mean? A financial transaction tax — essentially a tax on trading in financial instruments (likely stocks, bonds, and futures) — would likely dramatically reduce trading volumes, particularly for cost-sensitive traders like high frequency traders. It would also likely mean wider spreads for stocks, bonds, and futures.

"These are desperate people at desperate times considering desperate alternatives! It will never happen!," one trader active in high frequency trading circles wrote to me.

"If it's anything like what Reps. Perlmutter & Defazio proposed in 2009, it would put us and virtually all quant traders out of business overnight," another high frequency trader wrote.

Both are right — and it will be tough to adopt. Financial transaction taxes have been floated and proposed many times in the past. In the U.S., this was floated in the Dodd Frank legislation but was removed because of the negative impact it would have had on trading and liquidity.

It would be even tougher to implement across many jurisidictions in Europe. "The challenge in implementing a transaction tax is that transaction taxes have to be proposed and adopted across many jurisdictions in order to avoid imbalances of activity," one trader wrote to me.

"If Germany and France adopted transaction taxes without the rest of the European countries, transactions would migrate and create substantial imbalances in liquidity and volume...Given the competitive dynamics of those markets, it's very hard to implement transaction taxes absent consensus across a broad jurisdictional coverage."

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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