Italy launches tax on high-frequency transactions

Milan Stock Exchange
Giuseppe Cacace | AFP | Getty Images
Milan Stock Exchange

Italy introduced a levy on high-frequency and equity derivative trades on Monday, the second stage of a process started earlier this year to tax financial transactions in the country.

The tax - which will apply regardless of where the transaction is executed - follows an introductory scheme launched in March in the country which taxed both exchange-based and over-the-counter share trading.

(Read More: Warnings for Europe, US From Italy's Trading Tax)

The new levy will subject high-frequency trading (HFT) to a 0.02 percent tax on trades occurring every 0.5 seconds or faster. HFT hasn't been without its fair share of controversy in recent years. Blamed for high volatility in markets it uses software to post trades in microseconds. It is believed to be the reason behind a number of glitches on global stock markets over recent months.

Italy is not alone in the move to tax transactions, with France initiating its own in August 2012. Both moves are part of a grander European Commission project. The EU wants to ensure that the financial sector makes a fair and substantial contribution to public finances and to discourage financial transactions which do not contribute to the efficiency of financial markets.The idea has gained traction with 11 EU countries, also including Germany,Greece, and Spain, planning to introduce a pan-European financial transaction tax in January 2014 which will affect most equity, debt and derivative transactions.

(Read More: Europe Looks Sure to Gut Financial Transaction Tax)

But the project has had notable critics, with many believing that trade will just seek new jurisdictions such as the U.K. which is not participating in the pan-European scheme. Analysis from the International Securities Lending Association in June predicted that at least 65 percent of the European securities lending market would disappear as a result of the pan-European tax. France and Germany would be the markets most impacted, it said, and over 2 billion euros of revenues would be lost to long term investors.

Early evidence in Italy suggested that volumes were already being affected. In the first week after the first part of Italy's tax was implemented, volumes appeared to plummet on Milan's benchmark index, the FTSE MIB, with a drop to 30 percent of their 90-day average, according to Reuters. This lagged activity on Germany's DAX by around two-fifths and the U.K.'s FTSE 100 by two-thirds.

(Read More: EU Approves Financial Transactions Tax)

Data in early August from Reuters showed European monthly trade as a whole is up 14 percent in 2013 from 2012, but Italian turnover was down 10 percent. In France, which introduced a similar tax in August 2012, turnover was also down 10 percent.

The concept of financial transaction taxes or "Tobin" taxes originated with Nobel Laureate economist James Tobin in the 1970s. The idea has re-emerged since the financial crisis, with politicians in Europe seeing it as a way to make banks pay back the taxpayer money they received, and those in the U.S. hoping it could help plug the fiscal deficit.

By's Matt Clinch. Follow him on Twitter @mattclinch81