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Buckley, Ross; North, Gill --- "A Financial Transactions Tax: Inefficient or Needed Systemic Reform?" [2011] UNSWLRS 53

Last Updated: 22 December 2011

A Financial Transactions Tax: Inefficient or Needed Systemic Reform?

Ross P Buckley, University of New South Wales*
Gill North, University of New South Wales**


This article is to be published in Georgetown International Law Journal (forthcoming). This paper may also be referenced as [2011] UNSWLRS 53.


The European Commission has included a Eurozone financial transaction tax in its long-term budget, as a first step towards a global tax. This move was taken despite negative European Commission and International Monetary Fund staff reports, which concluded that a tax would reduce the efficiency of capital markets, and raise the cost of capital. The efficiency frameworks used in the staff reviews were unduly narrow. Markets work best when there are strong links between market trading and real economic activity. Of late, these links have become increasingly tenuous and latent market and financial system risks are mounting. Carefully calibrated legal and tax responses are required to change market behaviour. Such a tax as part of an integrated policy framework would reduce short-term momentum trading and promote longer-term investment that would better reflect underlying economic fundamentals. So we argue the European Commission is correct in proposing to adopt such a tax.



A. A Fair And Substantial Contribution By The Financial Sector: IMF Staff Final Report For The G-20

  1. IMF Working Paper: Taxing Financial Transactions: Issues and Evidence
    1. Asset Valuation and Cost of Capital
    2. Turnover
    3. Liquidity
    4. Price Discovery
    5. Volatility
      1. Short-term Volatility
      2. Longer-Term Volatility
    6. Waste
    7. Matheson Conclusions
    8. Our Response to the Report Findings
    1. Territorial Scope
    2. Taxable Event
    3. Tax Base
    4. Taxable Person
    5. Assessment & Collection of the Tax


The global financial crisis (GFC) sparked vigorous debate on the role of financial institutions and capital markets, and the extent to which financial institutions and other capital market participants should contribute to the broader economy. Much of this debate has centred on the appropriate mechanisms to enable governments to recoup taxpayer monies used to bail out failing institutions and appropriate tax regimes going forward. Proposals considered at an international level have included financial institution levies (such as a financial stability contribution), a financial activities tax (FAT) and a financial transaction tax (FTT) (sometimes referred to as a securities transaction tax). France, Germany, the United Kingdom (UK) and other countries have already imposed levies on their financial industries to recoup bailout funds provided in the GFC, boost government revenues, and build a fund to help meet the cost of future crises.[1] This article focuses on a FTT as a needed addition, or alternative to, bank levies.[2]

Critics of a FTT argue that a tax would have distorting effects on the function of the market and would harm its efficiency due to reduced liquidity, higher volatility, and increased capital costs.[3] Those who support an FTT argue that by reducing trading volumes it would enhance the ability of markets to allocate resources efficiently, and allow important financial and human capital to be redeployed into more socially productive areas. Experts generally agree that collection of the tax through clearinghouses would be straightforward and cheap, and that tax avoidance can be minimised by applying the tax to a broad range of transactions across all jurisdictions.[4]

Staff of the European Commission (EC) and the International Monetary Fund (IMF) considered a FTT in 2010. Both of these reports rejected the tax in favour of other revenue raising schemes. The EC report indicated that “[e]ssentially, the debate on financial transaction taxes boils down to the question of the influence of transaction costs on trade volume and price volatility, and whether they can serve as a corrective device to reduce the number of allegedly harmful short-term traders.”[5] Although the IMF report was more comprehensive in scope, it also focused primarily on short-term trading, liquidity, price discovery, volatility and cost of capital effects.

The article outlines and discusses the EC and IMF staff reports. We argue that the frameworks used to assess the efficiency, economic and other effects of a FTT are unduly narrow. The primary argument in the reports is that increased trading leads to enhanced liquidity and lower transactions costs, which leads to lower costs of capital and improved economic outcomes (the trading cost of capital model). This argument is repeated like a mantra. However, the empirical research referenced in the reports is generally limited to microstructure studies, with the crucial links from the short-term price effects to long-term economic and community outcomes assumed rather than established. The critical bigger picture issues are glossed over in the belief that first, there is no evidence that the dramatic increase in market trading levels of recent years has been inefficient; and second, there is no decisive evidence that the way capital markets operate had anything to do with the crisis. We question both of these assumptions.

The main lesson to be learned from the GFC is that policy analysis founded on efficiency or economic outcomes must adopt a broad perspective and measure the impact of the policy upon the real economy over a long time frame. Policy assessment of efficiency and economic effects must extend beyond short-term financial variable effects to the likely longer-term economic impacts and public interest factors. Prior to the GFC many claims were made about the effective risk management, efficiency, and innovativeness of the mortgage market and securistisation processes in the US. Few commentators stepped back from day-to-day events to think about the soundness and sustainability of the housing, mortgage, and securitisation trends.

Similarly, a farsighted, arms length, and pragmatic review is required of recent developments in capital market trading. Large institutions are driving ever increasing global securities trading levels. This is understandable as market participants have strong incentives in markets to try to outplay the next party. What is less clear, but crucial to understand, is why many policy makers and scholars are once again actively advocating and supporting market trading developments on efficiency, risk enhancement, and innovation grounds. Capital markets remain the best available mechanism to determine security prices and allocate financial resources efficiently. However, the net efficiency and economic gains from increasing trading activity are uncertain. Indeed, we argue that the trading cost of capital model is flawed – the asserted economic benefits are largely illusory and the trading environment poses significant long-term risks to the real economy.

The market patterns of high frequency trading, computer generated activity and short-termism are now well entrenched, so behaviour will be difficult to change. A serious response will require a range of carefully calibrated legal and tax policies. We support the introduction of a low level FTT as part of this overall framework to promote greater alignment between capital market and economic activity. A transactions tax would discourage short-term speculative and technical trading and promote more stable and patient investment aligned with fundamental valuations. In contrast, a bank levy and FAT as proposed by the IMF will raise funds but will not reorient market trading behaviour. For this reason, a FTT is to be preferred over a FAT.

Despite the negative EC and IMF reviews, discussion on a proposed FTT continues at a European and global level. Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor, support the tax.[6] The EC notes that “[i]ntroduction of a tax on financial transactions ought to be as broadly based as possible or, failing that, the financial transaction tax should be introduced as a first step at European Union (EU) level.”[7] On this basis, President Barroso, Taxation Commissioner Šemeta and Budget Commissioner Lewandowski publicly support a European based tax. In June 2011 the EC included a EU wide FTT as part of the funding in its long-term budget (2014-2020).[8] The EC will present the required regulations to the European Council and European Parliament by the end of 2011.[9]

At a global level, the communique from the G20 finance official meetings in October 2011 indicated that options for innovative financing and a range of different financial taxes were discussed.[10] The subsequent G20 summit communique acknowledged the initiatives in some countries “to tax the financial sector for various purposes, including a financial transaction tax.”[11] This vague commentary reflects the significant political divisions among the G20 countries towards a FTT.

Wolfgang Schaeuble, the German Finance Minister argues that even though there is no consensus on a global based FTT, the tax is needed in Europe, and it will be implemented with great energy.[12] He suggests that if ‘we go ahead with a FTT a lot of other parts of the world economy will follow us’.[13] Sarkozy told a news conference at the end of the G20 leaders’ summit that “I remain convinced [the tax] is possible ... that it’s indispensable financially given the crisis and that morally it is absolutely necessary”.[14]

Given the high levels of public debt in Europe, US and elsewhere, the risks associated with sudden changes in trading activity, and the fragile state of international markets, we continue to call for a global FTT with support from all policymakers and regulators.[15] An international FTT would minimise market distortions and the transfer of trading activity to untaxed jurisdictions.[16] Should Europe establish a tax limited to the Eurozone, it should be carefully structured to minimise the relocation of financial activity and any negative effects on markets.

The tax should be designed to target trading issues of most concern and its efficacy should be reviewed after five years. If a tax scheme is not introduced, other policy options to alter capital market structures and trading behaviour should be considered. While the reforms included in the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173) will assist, in the absence of a FTT, much more will be needed to ensure capital markets operate in the long-term interests of the global community.

The article is in eight parts. Part II describes the market-trading environment. Part III outlines the arguments for an FTT. Part IV outlines the EC summary review of the FTT, while Part V discusses the more comprehensive IMF reviews of the FTT option. Part VI considers the administrative feasibility of a FTT. Part VII reviews recent developments. The final part provides our summary critique and conclusion.

The key market trends and general principles and concerns that underpin the need for a FTT are outlined initially. To properly assess the EC and IMF arguments and findings, an understanding of capital market developments is needed.


Over the last twenty years there has been rapid growth in the levels of global market activity, well above those of the economy.[17] The ratio of the volume of financial transactions relative to nominal world gross domestic product (GDP) in 2007 was seventy-five point three, compared to fifteen point three in 1990.[18] The increase in volumes was driven by derivative trading,[19] as spot transactions of stocks, bonds and foreign exchange grew roughly in line with nominal world GDP.[20] Eighty eight percent of the transactions in 2007 were derivative based[21] and 64 percent were fixed income security derivatives.[22]

An increasing proportion of market trades are short-term and technically driven. In 2009, algorithmic[23] or computer-driven trading accounted for at least 60 percent of equity market trading volume in the US and 30-40 percent of European and Japanese equity trading.[24] Similarly, 40 percent of the futures trading volumes in the US, 10-20 percent of the foreign exchange trading volume, and 20 percent of the options trading volume, were algorithmically driven.[25]

Many transactions involve “high frequency trading” (HFT) aimed at exploiting minor price fluctuations.[26] HFT typically involves the generation of massive numbers of orders for very short periods (often less than a second), many of which are subsequently cancelled to mask the true intent of the trader.[27] Estimates of the proportion of trading classed as HFT vary depending on the definition used but generally fall within the 50-75 percent range.[28]

HFT is founded on an ability to transact rapidly. To enable faster processing speeds, market participants are locating their systems beside or within the building of the relevant exchange. This co-location process reduces the latency time: the period it takes for the trading data to transact across the electronic trading systems. French hedge funds moved their trading computers to London because the time it took electronic messages to travel from Paris was placing them at a disadvantage. Similarly, Goldman Sachs moved its computers beside those of NASDAQ because each millisecond gained, by their calculations, added more than US$100 million to company profits.[29] In January 2010, a project was discussed to build an optical cable through the Arctic Sea between the financial centres in London and Tokyo at a cost of US$1.3 billion to cut latency times for data transmission from 140 to eighty eight milliseconds.[30]
An increasing portion of market activity is being driven by hedge funds. Global assets under management in hedge funds have grown rapidly over the last decade to between $2-3 trillion in assets.[31] Kapoor indicates that

hedge funds dominate trading activity in equity markets, account for more than 50% of the volume in certain kinds of [over-the-counter] (OTC)] derivatives, are by far the biggest players (by volume) in certain fixed income markets, are fast increasing their market share in foreign exchange markets and are prominent actors in commodity markets.[32]

Hedge funds already account for 90 percent of the volume in convertible bonds, between 55-60 percent of the transactions in leveraged loans, almost 90 percent of the trading in distressed debt, and more than 60 percent of the volume in the credit default market.[33] Nevertheless, the share of market trading by hedge funds is likely to rise further as regulatory reforms such as the Volcker Rule in the US[34] and more stringent global capital rules constrain banks from engaging in proprietary trading or owning hedge funds.

The benefits and risks posed by the hedge fund industry continue to be hotly debated. No evidence has been found suggesting that hedge fund activity directly contributed to the GFC. However, each financial crisis raises questions about the role played by hedge funds in financial markets.[35] Hedge funds were implicated in the 1992 currency crisis in Europe. There were also allegations of large hedge fund transactions in various Asian currency markets in the lead up to, and in the wake of, the Asian financial crisis in 1997. These concerns were compounded by the potential insolvency of the major US hedge fund, Long-Term Capital Management in 1998.[36]

The International Organization of Securities Commissions confirms that hedge funds play an important role in global capital markets. Trading by hedge funds can enhance price efficiency, market liquidity, product innovation and investor asset diversification.[37] At the same time, however, the activities of hedge funds pose risks to market integrity, investor protection, and financial stability.[38] The amount of trading and the share of global securities transactions by hedge funds continue to grow.[39] Many hedge funds trade primarily in derivative instruments, which “compounds ... [the] problems of information and evaluation for bank management, [other investors] and supervisors alike.”[40] These risks are magnified when financial markets are suffering from stress or instability, particularly when the hedge funds are large or highly leveraged. During periods of market volatility or reduced liquidity, the unwinding of concentrated or leveraged positions can cause major market dislocation and disorderly pricing.[41]

The sustainability of the ever-increasing levels of securities trading, in the form of derivative instruments with ultra-short holding periods by the largest financial institutions including hedge funds is questionable. However, it will not be easy to alter the entrenched patterns of trading, as the operations of capital markets are complex. To do so will require a range of substantive polices including changes to market infrastructure. The introduction of a low-level FTT as part of this process would promote greater alignment between capital market and economic activity.


The FTT debate to date has centred on efficiency and economic goals and effects. Keynes was one of the earliest proponents of a securities transaction tax to curb speculative bubbles. He suggested in 1936 that the “introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprises in the US.”[42] He argued that when:

[T]he capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield cannot be claimed as one of the outstanding triumphs of laissez faire capitalism – which is not surprising if I am right in thinking that the best brains of Wall Street have in fact been directed towards a different object.[43]

Similarly, Joseph Stiglitz indicated in 1989 that:

If, one thinks as I do, that the most important function (from the social view) of the stock market is raising new equity capital, one cannot but be struck by how, under current circumstances, it seems to do so little of this at great cost ... most of these resources are not spent in raising new funds but in rearranging ownership claims on society’s resources ... Resources devoted to gambling – and to short-term speculation in the stock market – could be devoted to more productive uses.[44]

In the wake of the GFC, these long-standing arguments about speculative trading have intensified. The base of FTT supporters has expanded to include highly respected policy makers, academics, and practitioners. For example, the advisory committee of Redefine, a policy think tank actively campaigning for the tax, includes leading investment banking executives, policy makers, and scholars.[45] Warren Buffett and George Soros, who have made their fortunes in financial markets, also believe the tax would improve the operations of markets.[46] These parties are concerned about excessive trading levels, speculative trading, a pervasive culture of short-termism in markets, and the dislocation between capital markets and the real economy.

The debate has also broadened to encompass discussion on the role of the finance industry in society. An increasing number of commentators question the social usefulness of the growth of transactions that boost the relative and absolute size of the finance industry. Financial services have become such a significant part of the total economy in some countries that it is suggested that too many of the best-educated individuals in these countries are trading paper assets rather than creating real wealth.[47] The Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System highlights that the:

measure of success of financial policy should not be the rate of growth or the size of the financial sector as a share of GDP. Indeed, an excessively large financial sector relative to the GDP of a medium to large economy should be a cause of concern to those interested in long-term economic growth because financial crises are often associated with unsustainable growth of the financial sector.[48]

Similarly, Lord Turner, Chairman of the United Kingdom’s Financial Services Agency, argues that the City of London has grown “beyond a reasonable size. He describes much of the current market trading as “socially useless activity,”[49] and suggests that:

[P]arts of the financial services industries need to reflect deeply on their role in the economy, and to recommit to a focus on their essential and economic functions ... not all financial innovation is valuable, not all trading plays a useful role, and ... a bigger financial system is not necessarily a better one ... parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society ...[50]

Whilst the comments by Stiglitz and Lord Turner are profound, arguably they raise more questions than they answer. The underlying issues that remain largely unresolved include the following:

• What are the important connections and links from capital market activity to sustainable economic growth?

• What are the benefits and risks to society from fair/unfair and efficient/inefficient capital markets?

• To what extent is financial services and trading activity in markets zero sum (that is, it merely alters the distribution of wealth among market participants without adding to economic and society outcomes)?

• How are the net economic benefits created from market activity distributed? What proportion of the wealth created from market activity is simply redistributed to the finance industry in the form of higher salaries or profits?

• What types of financial innovations provide long-term value to the global community beyond the profits or wealth generated for the product creators?

• To what extent are short-term economic gains generated from financial sector activity during boom times mitigated or lost during subsequent crises or economic downturns?

Some of these “bigger picture issues” are being debated in various fora. For example, in April 2011, 1000 economists signed a letter to the G20 urging them to accept a FTT.[51] The letter states that the “financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken ... It is time to fix this link and for the financial sector to give something back to society ... this tax is technically feasible. It is morally right.”[52]

Much of the policy and scholarly debate relating to capital markets continues to be narrowly framed by short-term price efficiency goals and an assumption that capital markets work most efficiently when left alone. Such a framework is reflected in the EC and IMF reports that considered options to raise money from the finance sector in the wake of the GFC. The EC and IMF reports reject a FTT as an option on “efficiency” grounds and argue that most parties including consumers would be harmed by the tax. Both reports imply that the real economy and the public are benefiting from increased market trading levels due to enhanced liquidity and price discovery, which in turn, reduces costs of capital. This core argument is presented as a fact that has been scientifically verified. However, the adopted theoretical and empirical frameworks to support the cost of capital arguments are not explained, the crucial connections to long-term economic outcomes are generally assumed, and any effects beyond efficiency factors are largely ignored.

The EC report (the Report) analysis is presented in a summary format. The IMF reported in two stages. A staff report in June 2010 provided summary arguments and conclusions. A later working paper by Matheson reviewed the issues more comprehensively. Most of our critique deals with the detailed analysis in the Matheson paper.


In March 2010, the European Parliament adopted a resolution requesting the EC to assess a FTT in comparison to other revenue raising options. This process took place as part of the international debate, including by the G-20, on new sources of finance to: support fiscal consolidation; recoup the costs of bail-outs; fund future crisis intervention measures; and finance global development and climate change measures.[53]

The criteria used by the EC for assessing innovative sources were:

  1. The potential for increasing the efficiency and stability of markets;
  2. The effects on equity and income distribution;
  3. Legal and administrative aspects; and
  4. Its political acceptability.[54]

The Report ultimately rejects the argument by proponents of the FTT that “the tax would reduce noise and technical trade, thereby linking trade more closely to the underlying fundamental economic market conditions and make financial markets less volatile.”[55] It questions the assumption that most short-term trading is highly speculative or based on technical trading, and suggests the time horizon of an investment is not a good predictor for the degree of speculation. It notes that short-term transactions are often related to trade or other commercial transactions and “it has proven to be extremely difficult to make a meaningful and operational distinction between speculative and non-speculative transactions.”[56]

The Report argues that a FTT poses a risk of increasing the cost of capital for businesses and the cost of financial risk distribution. Further, the tax would increase the hedging cost for all companies and the use of derivatives as insurance devices could be seriously affected.[57] It even suggests the tax could increase financial costs for governments because they might have to pay higher interest rates.[58] The Report highlights that there is no empirical data to support the argument that the tax would be of a progressive nature, and expresses concern that it would burden pension funds that manage the savings of middle and low-income earners.[59] It stresses the need to properly define the scope of the tax, including the tax base and other administrative design features.[60]

Overall, the Report conclusions are strongly negative. The Report suggests the tax could have adverse effects on investment and economic activity and highlights the risk of potential loss of whole market segments if the tax is not comprehensive in geographical and product scope.[61] It raises potential legal issues around the free movement of capital and payments between Member States.[62] It also highlights the asymmetric revenue allocations, with most of the revenue collected in countries with significant financial centres. It points to the need for international solutions, and questions whether an agreement to share the revenues internationally could be reached.[63]

The Report findings are myopic and overstated. The arguments concerning potential risk or adverse consequences arising from the trading environment are dismissed on the grounds that there is no evidence that the GFC was triggered by excess transactions and it is not possible to prove that ultra high frequency trading is speculative.[64] The factors the Report identifies as resulting in the crisis are limited to excess leverage and the taking of undue risk by financial institutions.[65] Put simply, the Report indicates there is no evidence of any issues arising from capital market activity and therefore no basis for any form of interference that may distort market functions. Yet the Report simultaneously makes unsubstantiated claims that: the tax poses a risk of increasing “the cost of capital for business and the cost of financial risk allocation”;[66] the use of derivatives for genuine hedging purposes would be seriously affected; governments may have to pay higher interest charges; the tax would have adverse effects on investment and economic activity; and pension funds would be burdened.[67]

As previously outlined, discussion on a proposed FTT continues despite the negative Report findings. In June 2011, the EC included a EU wide FTT as part of the funding in its long-term budget (2014-2020).[68] The EC will put forward a legislative proposal for the tax before the end of 2011.

The EC indicates that a FTT is likely to be introduced in the EU by January 1, 2018 at the latest.[69] The tax will apply to shares, bonds, and derivatives on shares and bonds. The proposed tax rates are 0.1 percent on shares and bonds and 0.01 percent on the derivatives of shares and bonds. The tax base applying to derivatives is the nominal value of the underlying assets. The proposed tax will be levied according to the fiscal residence of the seller of an asset (country of origin principle). The tax is expected to raise more than thirty billion euros by 2020[70] and up to fifty billion euros should currency transactions be included. The revenues from the tax are to go to the general EU budget.[71] The proposal requires ratification by all member state to become effective. A unanimous decision would have to be taken on the final form of the 2014-2020 EU budget by the Council after consulting the European Parliament. As the UK remains firmly opposed to the tax, it is only likely to be implemented across the twenty-seven EC countries after a long tussle between national governments, the EC, and the European Parliament.[72]

The G-20 discussed a FTT when it considered options in 2009 to ensure the financial sector makes a fair and substantial contribution towards government revenues. The summit asked the IMF to prepare a report for their meeting in June 2010.


As indicated earlier, the IMF reported in two stages. A staff report in June 2010 provided summary arguments and conclusions. A later working paper by Matheson reviewed the issues more comprehensively. The staff report notes that “[e]xpecting taxpayers to support the [financial] sector during bad times while allowing owners, managers and/or creditors of financial institutions to enjoy the full gains of good times misallocates resources and undermines long-term growth.”[73] They acknowledge that many of the developed nations owed trillions of dollars in debt and funds had to be raised from the finance industry to build up reserves.

A. A Fair And Substantial Contribution By The Financial Sector: IMF Staff Final Report For The G-20

The IMF staff comprehensively reject the FTT option and conclude that it “does not appear well suited to the specific purposes set out in the mandate from G-20 leaders.”[74] They indicate that a FTT is not the best instrument because:

The staff indicate that a FTT would not target the acknowledged attributes of systemic risk - institution size, interconnectedness, and substitutability.[76] They conclude that:

They suggest it is not obvious that the incidence would fall mainly on either the better off or financial sector rents.[78] A large part of the tax burden may well be passed on to the users of financial services in the form of reduced return to savings, higher costs of borrowing and/or increases in final commodity prices. They indicate that the tax incidence depends on the price elasticities of demand and supply, and wider competitive conditions, in the different markets in which the tax would operate. They suggest these relevant elasticities are not readily observable and mostly not available for G-20 countries.[79]

The staff argue that a weakness of the FTT is that it taxes transactions between businesses, and as a tax levied on transactions at one stage, it cascades into prices at all further stages of production.[80] They highlight avoidance difficulties and issues associated with swaps.[81] They conclude that “care should be taken in assessing the potential efficiency of an FTT in raising revenue.”[82]

The staff ultimately recommend two levies; a Financial Stability Contribution to be levied on assets and accumulated to fund future bail-outs; and a Financial Activities Tax (FAT) to be levied on financial institution’s profits and staff remuneration. They suggest a FAT be set at levels from 0.2 percent to 0.4 percent of a nation’s GDP annually.[83] They indicate that a FAT would approximate a tax on rents in the financial sector if the base included only high levels of remuneration and the profit component excludes a normal return to capital.[84] They suggest a structure that taxes excess returns would mitigate excessive risk-taking and would tend to reduce the size of the financial sector with more certainty on its impact on the structure of financial markets than an FTT.[85]

As indicated previously, some countries, including France, Germany and the UK, have implemented levy or activity charges on their financial sectors. The revenue estimates for these charges are considerably less than for a global FTT.[86] More critically, these charges will not alter market-trading behaviour.

B. IMF Working Paper: Taxing Financial Transactions: Issues and Evidence

Matheson of the Fiscal Affairs Department at the IMF provides more detailed discussion on the efficiency and economic effects of a tax on traded securities.[87] He reviews the literature on transaction costs and the potential effects on security valuations, costs of capital, market turnover, liquidity, price discovery, volatility, and waste, but concedes that many efficiency factors within capital markets and links to economic outcomes remain largely unexplored.

We argue that the base of information from which the EC and IMF conclusions are formulated is too narrow for real world policy decision-making. The conclusions are generally restricted to short-term price effects evidenced in microstructure studies by finance, economic and accounting scholars. However, the limitations of these studies, the theoretical and practical assumptions underpinning them, and their links to broader macroeconomic studies are not explained. Moreover, the crucial links from the short-term price effects to long-term economic and community outcomes are assumed, without acknowledgment of the complexities around efficiency measures and effects in markets.

Nobody denies the importance of capital costs to economic outcomes. However, there are many uncertainties around cost of capital measures because they involve forward-looking analysis of “expected returns and pricing of risk”.[88] Furthermore, there is “no well-accepted analytical model for relating trading liquidity with cost of equity.”[89]

1. Asset Valuation and Cost of Capital

Matheson indicates that in accordance with economic theory, a steep decline in transaction costs over the past thirty five years has produced an increase in financial transactions relative to real activity.[90] He suggests that in line with theory, the lower transaction costs have encouraged primarily short-term trading.[91] He confirms that most of the growth in securities trading has been concentrated in derivative markets because these instruments typically have lower transaction costs relative to notional values than spot markets.[92] Matheson concedes that the explosion of derivatives trading, particularly for short-term security trading, raises concerns. He admits that the growth in derivatives trading “implies a corresponding growth in leverage, which increases liquidity and default risk, and may promote asset bubbles.”[93] He also notes that the increasing dominance of computer generated trading poses technical and systemic risks, particularly when these trades are correlated or are subject to herding behaviour, because this can potentially exacerbate price trends that are not fundamentally based. Matheson agrees that a tax that decreased short-term trading could reduce these risks.[94]

Nevertheless, Matheson indicates that theoretical models generally confirm that higher transaction costs, including those imposed by transaction taxes, are associated with lower asset prices.[95] He suggests that investors bid prices down to compensate for the higher cost to acquire or dispose of a security. In turn, the higher transaction costs raise the costs of capital for companies raising funds through taxed securities.[96] He notes the impact of an FTT on securities value and capital costs would be partially countered by the lengthening of the average holding period of securities, particularly for securities with narrow bid-ask spreads such as the stocks of the largest companies.[97] Accordingly, the “overall impact of a low rate (five basis points or less) FTT on the corporate cost of capital is ... likely to be quite modest.”[98]

Matheson suggests the impact of a FTT on a company’s cost of capital depends on the frequency of the trading in its shares, with a FTT having far more impact on the asset prices of securities with higher turnover such as large capitalization stocks.[99] However, he assumes rather than establishes the connecting links between short-term trading, asset valuation, and cost of capital.

Security valuation is a complex process that is affected by many variables. The securities of the largest companies are generally the most highly traded on a market. Any additional efficiencies generated from marginal liquidity changes to these already relatively liquid securities will reflect the law of diminishing returns. The argument that ever increasing levels of computer generated trading for holding periods of less than a second can infinitely improve a company’s valuation and lower its cost of capital, is incomplete and not really credible. These arguments overstate the importance of marginal liquidity and transaction costs within the security valuation process. They also downplay the market, valuation, and speculative risks associated with the increasing churn and decline in average holding period of securities.[100]

In any event, any efficiency benefits that arise from such trading must be weighed against the longer-term effects and risks, including the withdrawal of market participants due to a lack of fairness and confidence in the operations of the market; the potential for technology or momentum induced market issues; and the increasing market and financial system risks due to the increasing scale, concentration, interconnectedness and short-term focus of the global trading environment.[101]

2. Turnover

Matheson concurs with Tobin that the imposition of a FTT, which increases transaction costs in the form of a widening of the bid-ask spread, discourages short-term trading in particular.[102] By raising transaction costs, a FTT would lengthen the average holding period of securities, particularly those with narrow bid-ask spreads.[103] Matheson summarises the studies that examined the trading volume effects from higher transaction costs as showing a broad range of elasticities across markets.[104]

Matheson notes that studies on the volume effects vary across asset classes and jurisdictions, depending largely on the opportunities for avoidance.[105] He cites one study by Schmidt that found relatively low elasticity to transaction costs for trading in the four largest currencies (US dollar, euro, sterling and yen).[106] The Schmidt study finding is important, as it suggests that potential large dislocative effects from a FTT can be minimised by applying the tax broadly to secondary security trading across all jurisdictions.

3. Liquidity

Matheson then considers the liquidity and price discovery effects flowing from lower trading volumes. He highlights that a reduction in trading volume driven by a FTT also reduces liquidity, defined as the price impact from a given trade.[107] He suggests that lower liquidity can in turn slow the price discovery process that ensures that prices quickly and accurately reflect new information.[108] However, Matheson notes that other models find the effect of a FTT on liquidity depends on the market microstructure.[109]

The comment by Matheson that the effects of a tax on liquidity may vary is not surprising. Liquidity effects are complex and depend on:

  1. the nature of the security;
  2. the time period over which liquidity is measured;
  3. market conditions;
  4. momentum factors; and
  5. investor confidence.

Secondary market trading is essential to maintain liquidity in traded securities. However, the tax related liquidity arguments must reflect real world trading patterns. Most of the increased trading activity is in the derivatives of securities and not in the spot markets.[110] In addition, most of the increased trading is concentrated in the areas of the market that are traditionally the most liquid segments of the market, namely, the fixed income and foreign exchange markets, and the equity securities of the largest companies.[111] No evidence is provided in the reports suggesting that the increased activity levels have materially improved the liquidity of the securities of smaller listed companies that tend to attract lower trading levels.

Second, short-term improvements in specified efficiency proxies may be negated over longer periods of time. For instance, while trading on private or inside information may in some circumstances enhance liquidity, empirical research suggests that any short-term liquidity gains arising from such trading may be outweighed over the long run by reductions in other efficiency measures such as bid-ask spreads,[112] price accuracy and capital costs.[113]

Third, empirical studies indicate that liquidity responds asymmetrically to changes in asset market values. Liquidity decreases far more in conditions where market returns are decreasing than in positive markets.[114] The most significant liquidity issues arise following large market declines because the available collateral of market participants is reduced and many security holders are forced to sell, resulting in a lack of liquidity precisely when the market most needs it.[115]

Fourth, liquidity issues are subject to contagion. When an increased level of trading is driven by momentum factors, those trades are often one sided. For instance, on May 6 2010 in the US, a large sell order of the Chicago Mercantile Exchange S&P 500 E-mini futures contracts and subsequent intense selling pressure driven by algorithms quickly drained the market of buy orders and led to a technology induced crisis (referred to as the “flash crash”).[116] Sustained liquidity requires a diversity of views and willingness to trade through all periods, particularly during negative market conditions.

Fifth, sustained liquidity also requires investor confidence in individual securities and in the markets generally. The most significant capital availability issues and negative increases in spreads tend to arise when investor confidence is lacking, weak or volatile. These patterns were evident following the 1987 crash[117] and during the GFC, and investor confidence remains fragile in most markets, suggesting the alleged liquidity benefits resulting from high trading levels must be assessed over full economic cycles. Finally, it is worth highlighting again that there is “no well-accepted analytical model for relating trading liquidity with cost of equity.”[118]

4. Price Discovery

The empirical studies that examine the impact of transaction costs on the price discovery process often investigate changes in the autocorrelation of market returns in response to changes in FTT rates. The studies find the autocorrelation of returns increase (decrease) with an increase (decrease) in the rates of a FTT. The study authors infer that the identified changes in autocorrelation of returns mean that an FTT would slow the rate at which new information is incorporated into the security prices by reducing the level of trades.[119]

The relevance of these studies to the FTT debate is not clear. Those that argue for polices on the basis of short-term price formation or price efficiency goals generally assume automatic links to long-term economic gains. However, such links are only established when the allegedly “inefficient” prices impact significantly on the cost of new capital. If information is not incorporated into a security price for a millisecond or even a few minutes or hours, this may alter the distribution of profits between market participants, but is unlikely to affect the ability of a company to raise capital or its long-term cost of capital.

5. Volatility

A FTT may affect short-term price volatility and long-term asset price swings that potentially develop into bubbles and crashes. Matheson suggests that while both of these types of volatility are of concern because they distort fundamental price signals, the long-term mispricing is of more concern because it can result in serious macroeconomic externalities.[120] We agree.

i. Short-term Volatility

The theoretical models on the relationship between a FTT and short-term price volatility are ambiguous.[121] The empirical investigations that consider the short-term price volatility effects of taxes show either no effect on volatility or a positive effect.[122]

Most of the cited studies assess volatility by measuring the transaction to transaction price changes. However, the drivers of short-term volatility are difficult to isolate. For instance, French and Roll found that market volatility between Tuesdays and Thursdays was halved when the market was closed during Wednesdays.[123] In addition, there is some evidence that trading activity itself generates short-term price volatility,[124] and on this basis, a transaction tax that dampens trading activity may reduce price volatility.

In any event, the key question for policy makers is the exent to which volatility measures impact on the ability and cost of raising new capital over full economic cycles.[125] The volatility of most concern relates to significant momentum overshoots[126] that contribute or lead to sustained price swings driven by factors not related to the underlying economic values.[127]

ii. Longer-Term Volatility

There is a dearth of research on the relationship between transaction costs and long-term price volatility. Economic literature generally links bubbles and crashes to excesses in the leverage cycle.[128] There is a growing body of literature on measures to combat excessive leverage as a way to prevent bubbles.[129] Matheson concedes that a FTT may have a side effect of reducing leveraged trades, but suggests that a more direct means to discourage leveraged purchases would be to increase margin requirements or collateralisation.[130] Nevertheless, he suggests that transaction costs are merely one factor in determining market cycles, and not a decisive one. Indeed, he argues that while a FTT might slow the asset cycle swings, it could also slow corrections back to fundamental equilibrium. While there is empirical evidence that short-term trading tends to focus on technical trading, a practice associated with “noise trading”[131] and irrational herding behaviour,[132] some technical trading uses contrarian strategies and arbitrages price movements.[133]

6. Waste

All parties seem to accept that securities trading is a zero-sum game across a market. Some suggest that increased trading can add value if it permits more efficient allocation of risks among transactors.[134] However, it is difficult to see how very short-term trades contribute to better risk allocation. Notably it was argued leading up to the GFC that securitization was enhancing risk allocation, when in fact the risks were growing as they became increasingly concentrated within the largest financial institutions.[135] Much of the risk was hidden or latent which made tracking and analysis of the institutional and systemic risk difficult.[136]

Securities trades are now transacted across many exchanges, electronic communication networks, and broker dealers. The number of “orders executed in non-public trading venues such as dark pools and internalizing broker-dealers” is increasing.[137] The prevalence of HFT makes it difficult and time consuming for regulators to identify the trades and traders involved. Further, the scale, complexity and sophistication of the growing derivative trading and algorithmic transactions present investors with significant disclosure and security valuation issues.[138] The reporting of trading activity even within the US “often has format, compatibility and clock-synchronization differences.”[139] These difficulties are compounded when trying to determine global exposures. Global regulators are improving their systems and audit trails in an endeavour to better monitor trading activity and market developments,[140] but continuing rises in the level and complexity of trading activity make this an ongoing challenge.

There is no doubt that secondary market trading is essential to maintain liquidity in listed securities. However, at some point the level of market trading becomes inefficient from a societal perspective because there are costs and effects associated with all trading.[141] Many parties highlight the decline in the cost of individual trades.[142] However, total revenue earned by global exchanges continues to increase, suggesting that total transaction costs have increased.[143] If this is the case, social waste arises when the increased trading is not generating marginal wealth over the full economic cycle equivalent to the additional trading costs. It is important from the public perspective to know which parties are bearing the additional trading costs and where the wealth created is flowing, particularly if the trading developments ultimately result in systemic crises or losses that require taxpayer funding or that adversely impact retirement incomes.

Global empirical studies on performance confirm that very few individuals or institutions are able to persistently outperform the market.[144] Consequently, some economists describe the secondary trading process as a “quest for rent” rather than activity that provides returns to society on productive assets.[145] That is, it determines how the pie is divided rather than increasing the size of the pie.[146] The largest financial institutions are increasing their activity levels to potentially augment trading profits, and their policy advocacy of the trading cost of capital model is aligned to this end. The recent trading patterns serve the interests of the largest players by enhancing their relative position and enabling them to profit from trades with the other participants. Parties do not trade in capital markets primarily to enhance efficiency or the public good. Policy debates on efficiency in markets must therefore differentiate between the efficiencies and wealth created for specific market participants, individual nations, and society. The real question is the extent to which the increasing transactions are resulting in improved long-term economic outcomes or benefits to the broader community.[147]

Given the complexities of the markets and the difficulties in controlling and measuring endogenous efficiency effects across markets and economies, it is not possible for empirical studies to draw a line in the sand as to the optimal level of market trading. While policy decision-making should be supported by empirical evidence where possible, the limitations of controlled empirical studies means that many efficiency or economic effects cannot be tested or verified. Moreover, as discussed in other fora, empirical evidence on efficiency effects should be cited with care.[148] Empirical studies require defined assumptions and proxies, and the credibility and relevance of individual studies depend on the accuracy and relevance of the selected models and assumptions.

The definition of the dependent variable used in a regression model is critical to the outcome. Empirical research efficiency proxies are highly interdependent. Improvement in one proxy in specified circumstances may be negated by reductions in other efficiency measures. As discussed earlier, studies are cited to support the argument that the tax may impede price discovery.[149] However, the links from the price discovery argument to sustainable cost of capital reductions and economic gains are not explained or established. The purpose of most capital market trading is to profit from information (whether obtained on a private or public basis) in advance of other traders. It is unlikely that “investments made with a horizon of hours [or seconds or milliseconds] reveal much socially beneficial information to the market place.”[150] As previously highlighted, if information is not incorporated into a security price for a millisecond or even a few minutes or hours, the distribution of profits between market participants may change, but there is generally minimal or no impact on the allocation and cost of real capital.

The time period over which efficiency is measured is also critical.[151] Policy makers should be most concerned with long-term effects on security prices, markets and economies. Short-term improvements in specified efficiency proxies may be negated over longer periods of time. The return effects observed in studies on transaction costs may reflect fundamentally based market responses or over or under reactions that are later mitigated or reversed. Event studies use a variety of time periods, but many are restricted to a few days or months after a specified event. As indicated previously, trading on private or inside information may in some circumstances enhance short-term price accuracy and liquidity. However, studies suggest any efficiency gains arising from such trading are outweighed over the long run by increases in market volatility[152] and reductions in other efficiency measures such as bid ask spreads, liquidity, price accuracy, and capital costs due to reduced transparency and lower investor confidence and trust levels.[153]

Consequently, the efficiency and cost of capital effects need to be assessed over a lengthy period. Over the long run, the “integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of ... [a] nation.”[154] This proposition is starkly evident in the present environment. If the nature of a market and the trading patterns result in the essential “equity market structure break[ing] down – if [the market] fails ... to provide the necessary fairness, stability, and efficiency – investors and companies may [and do] pull back, raising [capital] costs and reducing growth.”[155]

As previously discussed, market conditions are critical to efficiency measures. Policy makers should be most concerned by the large negative economic and other effects that arise during bust periods of an economic cycle. Some scholars argue these effects are more severe when linked to a financial crisis.[156] The dire condition of much of the developed world today provides compelling evidence to support these theories and arguments.

Further study is required to assess the costs and benefits of short-term trading and the long-term impact of such trading on market function, asset prices and investor confidence. Future research should consider the following issues:

• Why is most securities trading in the form of derivative instruments rather than through the spot markets? What are the latent risks when 90 percent of global securities trading is derivative based? And are the empirical studies that examine efficiency effects in equity markets generalisable to equity derivatives and to trading in fixed income and currency markets?

• Do market participants that value and trade securities on a fundamental basis capitalise higher transaction costs into their valuations as trading levels increase? And do participants that turnover their portfolio once a year value equivalent securities significantly lower than parties who trade multiple times over a year, a week or a day? If so, is there a limit on these valuation differentials?

• Are listed companies and governments achieving sustainable improvements in capital costs because of increased turnover of the securities in the form of derivatives? And can market participants permanently increase the value of all types of traded securities because of increased trading in the form of derivatives? If so, is there a limit on such improvements?

• To what extent are securities valuations and primary issuance costs impacted by changes in investor confidence and trust?

7. Matheson Conclusions

Matheson summarises the empirical research on FTTs as follows:

  1. They reduce security values and raise the cost of capital for issuers, particularly issuers of frequently traded securities.
  2. They reduce trading volume, particularly in short-term transactions, which in turn reduces liquidity and may slow price discovery.
  3. They do not reduce short-term price volatility.[157]

Matheson suggests that if the impact of a FTT of two basis points reduced turnover on the S&P 500 to the average level of 2005 (0.8 years), it would lower stock values by 1 percent and raise the cost of capital by three basis points. He concedes the effect on the bond market would be lower as holding periods on bonds are typically longer.[158]

Matheson describes the effects of a FTT beyond a reduction in trading levels as lowering financials sector profits. He suggests that financial firms would likely pass the cost onto clients, imposing higher costs on financial institutions, institutional investors, publicly listed companies and companies involved in cross-border trade and finance. He assumes the tax would cascade through financial activities and its cumulative impact on certain activities could be substantial.[159]

Matheson concludes that while FTTs appear to “conform to the tax policy precept of levying a low rate on a broad base, they conflict with the precept that, because gross transaction taxes distort production, they should therefore be avoided when more efficient tax instruments are available.”[160]

8. Our Response to the Report Findings

Many of the EC and IMF arguments on the likely impacts of the tax lack a sense of proportion. Matheson’s conclusions do not flow naturally from his preceding analysis and are not fully consistent with his prior comments. As noted, long-term rather than short-term volatility is the primary concern related to momentum over swings and asset bubbles. In addition, trading volume effects show a broad range of elasticities. A small transaction tax would not deter the use of derivative trading for genuine hedging purposes as these transactions tend to be one-off or irregular transactions. A tax levied against the value of the underlying asset places most of the burden on traders with a short time horizon rather than on pension funds. Many institutional pension and mutual funds aim to limit the turnover of their portfolios. Accordingly, the impact of the tax on these investors is likely to be minimal. As noted earlier, reductions in security transaction costs since the 1970s have resulted in large increases in trading activity, predominantly in short-term trading. Conversely a FTT would discourage this short-term trading. The smaller the spread between the buy and sell prices of a transaction, the higher the impact of the tax on expected profits. As such, the tax has a more pronounced effect on derivative trading. Further, a tax based on the notional value of the transaction and the cash position would discourage highly leveraged transactions.

The reports do not explain what is meant by financial service “production.” These arguments seem to assume that most of the growing institutional trading is transacted on behalf of clients rather than on a proprietary basis. However, data on the extent of client versus proprietary trading is not provided. Further, the alleged cascading or cumulative impacts of a FTT are not clear. Companies generally determine client charges based largely on “what the market will bear” and whether existing or future competition allows them to pass on costs. Whilst the competitive environments of financial institutions vary markedly across the globe, the likelihood that an individual institution will pass on the cost of a tax or levy would depend on the level of competition rather than the form of the policy impost. To the extent that institutions are unable to pass on the tax, or that the trading is for the institution’s own account: the reported profits at the taxed institutions would fall, the lower profit levels would result in lower corporate tax, and the reduced profits may result in lower employee remuneration and employee levels[161] and a lower payout level to investors. Nevertheless, the tax is expected to provide significant net additional revenue.


In August 2011 the IMF considered the administrative feasibility of levying a FTT.[162] It concludes that a FTT “is no more difficult and, in some respects easier, to administer than other taxes.”[163] Nevertheless, there are structural and implementation issues that require careful consideration.[164] For the tax to be technically feasible, the following issues must be determined:

  1. the territorial scope of the tax;
  2. the definition of a taxable event;
  3. the tax base;
  4. the taxable person; and
  5. how the tax is to be assessed and collected.

1. Territorial Scope

The risk that traders will transfer their transactions to non-taxing jurisdictions would be significantly reduced by the introduction of a tax across all major financial centres in a uniform manner.[165] In the event the tax is implemented in individual countries or zones, these territories should consider provisions to dampen potential offshore migration of transactions. Measures to reduce avoidance of the tax include: applying the tax broadly to ensure that possible substitutes are subject to the tax; adopting a low tax rate; conditioning the legal standing of a transaction on the payment of the tax; and imposing a higher rate when the transactions exit a domestic market.[166] A broadly based tax would include “the purchase or sale of a financial instrument, an agreement that establishes a right or obligation to purchase or sell a financial instrument, or an exchange of payments based on a financial instrument, rate, index, or an event.”[167]

2. Taxable Event

The timing of the taxable event could be assessed on a cash or accrual basis, or a hybrid system that combines these two methods. Under the accrual rule, the tax applies when a person enters into a transaction. This methodology would be appropriate for instruments where the transaction price is agreed (or is required to be agreed) in the contract.[168] The cash rule applies the tax when a transaction is settled. This approach should be used where the transaction price is not known until after the contract is entered into.

3. Tax Base

The measure of the tax base could be either the consideration exchanged or the underlying notional value of the transaction.[169] The amount of consideration paid for spot trades is the spot price. The appropriate tax base for other types of transactions is more controversial. It is possible to limit the tax payable to the premium paid or strike price of an instrument such as a swap, option, futures or OTC contract. However, this option would strongly favour and promote even greater trading of derivative and highly leveraged instruments. If this were to occur, the potential financial system, market and trading risks would inherently increase. It is therefore critical that the FTT be applied to the full notional value of derivative instruments.

4. Taxable Person

The taxable person is the party legally liable for paying the tax. The splitting of the tax liability between counterparties is beneficial because this allows the relevant tax agencies to crosscheck payment by both parties.[170] When the trading is not executed or settled through exchanges or clearing houses, the person taxed could be the buyer or seller, or the broker dealer and market participant, each of who would be liable for paying half the tax. Alternatively, the tax could be applied proportionately to the resident participant.[171]

5. Assessment & Collection of the Tax

Experts agree the tax should be assessed and collected on exchange-traded instruments through the exchanges or their clearinghouses.[172] While the administrative issues are more challenging when dealing with OTC instruments, there are countries that already apply a tax to some OTC transactions.[173] Where OTC instruments are not centrally cleared, the tax liability could be self-assessed, collected and payable by the market participants such as securities dealers and large traders. Compliance with the tax liability could be enhanced by linking the legal standing and enforceability of the contract rights under the OTC instruments to payment of the tax.[174]


As previously outlined, the G20 finance ministers met for a series of meetings in Paris on October 14-15, 2011. Point four of the Paris communique stated that:

[w]e are more determined than ever to reform the financial sector to better serve the needs of our economies. We reaffirm our commitment to implement fully, consistent and in a non-discriminatory way agreed reforms on OTC derivatives, all Basel agreements on banking regulation within agreed timelines and reducing overreliance on credit ratings. We endorsed a comprehensive framework to reduce the risks posed by [systemically important financial institutions], including strengthened supervision ...[175]

The affirmed policy commitments are important responses within a global environment still devastated by the impacts of financial crises. However, the commentary on potential financing plans is vague. Point seven of the communique indicated that we “debated options for innovative financing, as well as a range of different financial taxes”. Similarly, the subsequent G20 summit communique simply acknowledged the initiatives in some countries “to tax the financial sector for various purposes, including a financial transaction tax.”[176]

Wolfgang Schaeuble, the German Finance Minister, stated in mid October 2011 that it was clear there was no chance of global agreement on the implementation of a FTT.[177] An unnamed G20 source indicated that opponents of a global tax included the US, the UK, Canada, India, and Australia.[178] A representative of the Obama Administration confirmed that the US “will pursue levies on the financial system ‘in their own way’, rather than through a common global tax plan”.[179] The UK government has warned that it will use its veto to block the tax unless it is levied globally. Commentators in the UK criticise the FTT as a “tax on the City of London”.[180] The British finance minister George Osborne claims that there “is not a single banker in this world that is going to pay this tax ... The people who will pay this tax are pensioners”.[181] Canada argues that its banks did not require bailing out and a FTT would be counterproductive “by reducing banks’ ability to lend during times of weak economic growth.”[182] A senior Indian Finance Ministry official indicated that India opposes a FTT because it would put an additional burden on the domestic banking system. China also suggested the tax would burden its local banks.[183]

Within the Eurozone, some countries have expressed concerns that the FTT may raise the interest rates on government loans.[184] The largest financial industry associations claim the tax would “reap major damage to the financial sector, resulting in an outflow of derivatives trades from Europe while also hitting the real economy.”[185]

Resistance to a global tax is therefore centred on: potential adverse impacts on financial institutions; higher government debt and bank loan costs; increased charges to pensioners; and negative effects on economic growth derived from financial activity. The argument that banks would be adversely affected or burdened by the FTT, and as a consequence less likely to lend, is difficult to comprehend. The connections between the introduction of a FTT, an additional burden on banks, and the banks’ proclivity to lend, are not clear. The tax would apply to secondary trading of securities and not to mortgages, bank loans or primary capital issues.[186] The claim that the main burden of the tax would fall on pensioners assumes that pension fund managers are initiating most of the short-term trades. While global data on trading participants is limited, it is highly unlikely that managers of long-term pension funds are generating most of the securities transactions and would pay a large share of the tax paid. To the extent that pension managers are involved in consistently high levels of short-term derivative trading, critics might consider whether this is sound public policy. Pensioner beneficiaries are ultimately more likely to derive a net benefit from a FTT that encourages a longer-term investment horizon.

As previously discussed in B1 of Part V of the article, the argument that increases in the level of secondary securities trading result in lower capital costs to primary issuers (including governments) on an ad infinitum basis is incomplete and not fully credible. Trading in most government securities is already highly liquid. The key factors impacting on governmental debt costs are the state of a government’s finances, the ability to repay the debt, and investor confidence in the global and individual country environments. Any possible benefits obtained from increased trading levels in government securities must be weighed against the risks of the massive capital flows moving on a millisecond and speculative basis by means of derivative trading, the increasing concentration and interconnectness of these flows, and the potential loss of investor and public confidence in the markets.

Many parties claim that continued increases in market and financial activity are inherently beneficial to the local economy and in the public interest. Such claims are often wielded as powerful weapons to deflect policy interference or changes to capital market structures and trading patterns. In the post GFC environment, it is vital that these “economic” and “public good” assertions are tested and critiqued in their totality, particularly when made by vested interests. Assessment of the national and public interest effects flowing from increased activity levels must use a wide-angled and long-sighted lens that considers all associated costs, including longer-term economic and other costs, as well as the opportunity costs.

Only a portion of the value created from the growth in global market and financial activity during the 1980s and 90s flowed into the real economy. Market participants such as exchanges, clearinghouses, financial institutions, financial intermediaries, and company registries benefited directly (and continue to benefit) from growth in securities trading levels.[187] These entities employed staff and advisors and paid taxes and dividends, creating direct and indirect economic and other benefits for the relevant countries. Over this period, the finance industry contribution to the economic output of many of the developed nations grew to a significant share.[188]

At the same time, however, some of the value created from higher activity levels was absorbed within the entities in the form of higher compensation to managers, directors and employees. For instance, rapid growth in the average compensation paid to employees in the financial sector in the US from the mid-2000s added significantly to a dramatic widening of income distribution that began in the 1980s.[189]

Furthermore, much of the contributed economic value prior to the GFC was subsequently lost in the wake of the crisis, as direct support to financial institutions, and as indirect costs borne by individual countries, their taxpayers, and the broader global community.[190] Some parties suggest that excessive trading did not cause the GFC.[191] However, the creation of complex OTC derivatives, the growing levels of institutional trading on a proprietary basis, and the willingness of parties to leverage their trading positions, were all interconnected factors that formed part of the crisis framework.

Finally, it is essential to the future well being of developed nations that policy makers consider whether the expanding capital and other resources required to generate the increases in financial and market activity could, and should, be applied to more productive business opportunities.

To summarize, those opposed to the FTT on efficiency or economic grounds need to ask themselves: whether growth based on the rapid turnover of derivative assets is real and in the public interest; whether the alleged efficiency, economic and public interest benefits are sustainable over the long run; what longer-term costs and issues are likely to arise if the developing market trends are allowed to continue; and whether there are alternate projects that would provide a better return on capital and that would be more clearly in the national interest? These parties should also indicate their preferred financing options for countries or zones burdened with excess public debt.

The German Chancellor, Angela Merkel, has openly criticised Barack Obama, the President of the US,[192] and David Cameron, the leader of the Coalition in the UK, for opposing the EU proposals for a FTT. She indicated that it

cannot be that those outside the eurozone who press us again and again for comprehensive action are, at the same time, comprehensively working together to prevent the introduction of a financial transaction tax ... This is out of order. We must ensure that financial market actors share in the costs of fighting the crisis. I will push for this until it happens, at least in Europe but preferably worldwide.[193]

Schaeuble confirmed that ‘[w]e have to do this in Europe and we will do this with great energy.’[194] The EC has publicly suggested that if Europe goes ahead with the tax, they expect other countries will follow their lead and introduce the tax.[195]

Pressure on the UK from the rest of Europe is building. Some EC representatives have suggested a FTT should be introduced as a value added tax, which could be imposed without Commission ratification and the right to veto the bill.[196] Such a move would be strongly opposed by the UK. Should the EC ultimately fail in its attempt to introduce a mandatory tax regime across the twenty-seven Eurozone members, the tax may be implemented initially in the seventeen countries that use the euro currency.[197]


The EC and IMF staff reports imply that global economies and the public are benefiting from increased trading levels due to enhanced liquidity and price discovery, which in turn leads to improved costs of capital. This core argument is presented as a well-accepted and soundly based theory that accurately reflects the real world, and explains the links and interconnections between short-term financial variables and long-term economic and other outcomes. However, the theoretical and empirical frameworks adopted to support the cost of capital model are not supported by evidence or outlined comprehensively; the limitations of microstructure empirical studies are not discussed; and the crucial links and connections from the cited studies to long-term global outcomes are assumed, not established.

The data, analysis, and assumptions underpinning the EC and IMF reports are too narrowly constructed as a basis for meaningful real world analysis. The conclusions are based on a limited set of possible short-term financial variable effects without sufficient understanding or thought given to the interconnections from the microstructure elements to the real economy outcomes as well as the public interest factors. The asserted positive effects from increased short-term trading are overstated, while the potential negative impacts of the capital market developments are understated or ignored on the basis that there is no empirical research confirming any adverse long-term consequences. The adopted analytical frameworks appear to be consistent with: a fundamental belief in the ability of markets to regulate themselves; a view that external regulation of markets should be kept to a minimum; and an emphasis on short-term efficiency or economic factors.

We need to step back and ask whether current financial market trading is so beneficial to global economies that we dare do nothing for fear it may distort market functions. Prior to the GFC, many financiers and scholars argued that securitization processes and the use and trading of derivative instruments improved “efficiency” by enhancing risk allocations among investors.[198] However, these efficiency arguments were shown to be incomplete and inaccurate, with devastating economic consequences. As Erskine suggests, the operations of the financial sector were generally dealt with as an unpacked “black box” within academic, policy-making, and regulatory circles.[199] The GFC “showed a considerable information deficit and lack of understanding of the economics of securities markets and the interconnections with the broader finance sector and the economy.”[200] The adopted models were constructed on narrow historical patterns without sufficient consideration of the underlying fundamental trends, systemic risk, and the occurrence of significant dislocative events and crises.[201] Whilst a review of empirical research as part of the policy decision-making process is to be applauded, the credibility of such analysis is undermined when the sources are narrowly selected, and the study’s assumptions, relevance and uncertainties are not carefully outlined and explained.

The real world is far more complex than the cited microstructure studies and the trading cost of capital model suggest. It is time for all parties to acknowledge the immense uncertainties and risks posed by modern financial markets and capital flows. Efficiency proxies as measured within a narrowly defined study may or may not affect both the efficiency across an entire market and the efficient allocation of real capital.[202] Furthermore, the marginal gains from improvements in efficiency may prove tiny compared to the losses caused or enhanced by the emerging capital market structures and trading patterns.

The interconnections between human behaviour, capital markets, economies and the global community are too uncertain, complex and dynamic to be fully represented in empirical or computer models.[203] We have to use our experience and judgment to unpack black boxes, to better understand the links and connections to long-term real world outcomes, and to assess systemic financial, economic and other risks. In the real world, there are very few perfect black box solutions; only frameworks that may result in less flawed outcomes than others.

Matheson acknowledges:

1. the leverage risks associated with increased derivative trading;[204]

2. the technical and systemic risks posed by computer generated trading, particularly when these trades are correlated and or subject to herding patterns; [205]

3. that long-term volatility and mispricing are of more concern than short-term effects because long-term volatility can lead to serious macroeconomic externalities;[206] and that

4. securities trading is ultimately a zero sum game and it is difficult to see how very short-term trades contribute to enhanced risk allocation.[207]

He suggests that the explosion of derivatives trading, particularly that of short-term securities raises concerns. He notes that growth in derivatives trading “implies a corresponding growth in leverage, which increases liquidity and default risk, and may promote asset bubbles.”[208] He admits that the increasing dominance of computer generated trading poses technical and systemic risks, particularly when these trades are correlated or are subject to herding behaviour, because this can potentially exacerbate price trends that are not fundamentally based. A tax that decreases short-term trading could reduce these risks and may reduce the level of leveraged trades as a secondary effect. Yet these significant risks, and the potential for a FTT to mitigate these risks, do not appear to have been taken into account in his final conclusions on the expected impacts of the tax.

Large financial institutions are driving most of the growing derivative, algorithmic, and high frequency trading. As these players become increasingly dominant, the operations of markets are becoming more concentrated and global in nature. Even if one accepts the arguments that the recent trading developments improve short-term efficiency and market function, these benefits must be weighed against the building systemic risks resulting from the increasingly concentrated and interconnected trading and capital flow exposures within financial markets and the global economy.[209] These significant risks and issues cannot simply be put into a “to be researched” basket or justified by reference to alleged marginal liquidity and transaction cost benefits.

The notion that “finance is an industry that exists to serve the real economy rather than the other way around”[210] has been forgotten.[211] Many of the claimed efficiency and economic benefits derived from ever increasing transaction volumes are likely to prove largely illusory. Arguably the trading data provides loud warning signals.[212] As the US Financial Stability Oversight Council warns in its 2011 annual report, “rapid growth in products and activities untested by time and adversity necessarily entails challenges and requires more care and attention.”[213]

All parties need to reflect more deeply on the credibility of the proposition that capital market trading, at levels greater than one hundred times GDP, for holding periods of less than a second, with much of the trading driven by computer algorithms, is benefiting the long-term interests of the global community. Policy makers need to ask themselves:

• Which parties are effectively controlling financial and market policy development;

• What is the primary function of such markets and who is primarily benefiting from the trading; and

• Will large sections of the population that rely on the markets for their retirement pensions trust such markets over the long-term or the intermediaries that are managing their money in such environments?

Discussion around market integrity and fairness issues is notably absent in the EC and IMF review reports. Yet the “integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of ... [a] nation.”[214] As Ronald Arculli, Chairman of the Hong Kong Exchange suggests,

[d]evelopments that strengthen our markets and make them more effective and efficient are to be welcomed. But those that can intensify systemic risk or disadvantage a certain segment of investors to the benefit of others raise concerns ... perhaps it is time to return to basics and remind ourselves of the true function of financial markets. Computer-generated liquidity is already affecting real liquidity and altering trading activity. We run the risk of having it all just being a mathematical playground for the few to the detriment of many. A piecemeal approach seems inadequate to these vast changes. Perhaps a more fundamental reassessment of how to achieve the right balance between humans and technology in the financial field is called for. We need to focus on what really adds economic value and how to ensure market integrity and fairness.[215]

Geithner highlights the need for the right balance between rules that protect consumers and investors and the economy, without stifling the competition and innovation that drives economic growth.[216] While few parties would disagree with this aspiration, maintaining such a balance over entire economic cycles is notoriously difficult. The temptation for us all is to focus on short-term economic gains and to largely ignore the longer-term risks and the consequences of inaction.

Leading up to the GFC, the Federal Reserve Governors (the Fed) saw the growth in the US subprime market as a natural and positive development that was allowing millions of people to own their own homes. As late as May 2007, Chairman Bernanke indicated that:

we believe that the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system ...
Credit market innovations have expanded opportunities for many households. Markets can overshoot, but ultimately, market forces also work to rein in excesses. For some, the self-correcting pullback may seem too late and too severe. But I believe that, in the long run, markets are better than regulators at allocating credit.[217]

Thus even as evidence of abuses in the housing and mortgage sectors grew, the Fed determined that the greater economic good or the “net societal benefit” was being served by allowing the subprime lending to continue.[218] This determination focused narrowly on the potential short-term economic gains and significantly underestimated the longer-term risks and costs.

Similarly, the continuing competition by developed nations to attract financial services activity means that policy makers are strongly tempted to implement and support polices that promote short-term domestic economic growth, without full consideration of the longer-term adverse economic and other consequences at a global level.[219] Even if it were possible to show that all countries would be better off by introducing a FTT, individual countries may remain reluctant to introduce a tax when others are not, for fear that business will be lost to the untaxed jurisdictions.

Policymakers may prefer to rely on narrowly constructed efficiency arguments for many reasons in making their decisions. It is all too easy to claim there is no evidence that market trading contributed to the GFC and no empirical evidence of any substantive risks flowing from the new trading environment. However, we should all consider how few parties warned of the impending issues leading up to the GFC and provided hard evidence of the increasing systemic risks. Furthermore, capital markets are constantly evolving, and to be effective, policy responses must adapt to changing conditions and market innovation. Regulatory structures and reforms will only be meaningful if they deter or mitigate the fallout from the next financial crisis, which will almost certainly centre on different circumstances and factors than those leading up to the GFC.

Opponents of the tax may well argue that resolution of the debt crises in Europe is the top priority for the G20. However, there are no quick fix or easy solutions to resolve the Eurozone problems. Moreover, even assuming successful resolution of the short-term issues. Europe and other developed countries with high levels of public debt will still need to establish sustainable financing mechanisms to significantly reduce their debt ratios over the medium to longer term.

The recent protests around the world, which started as the “Occupy Wall Street” movement, provide a compelling backdrop for policy makers considering market and financial reforms, including the introduction of a FTT.[220] On October 17, Ban Ki-Moon the United Nations Secretary-General urged G20 leaders to take action to “restore confidence and trust from the people [and] from the market”.[221] He indicated that global leaders must look beyond domestic issues in order to tackle the international financial crisis. We agree.

Implementation of a global FTT would satisfy multiple policy objectives. An appropriately structured global FTT would improve market function and reduce system risks by dampening or discouraging ultra short-term trading and trading of non-commercial derivatives and leveraged instruments. The tax could also meaningfully reduce the sovereign debt levels and associated risk crippling many developed nations, and would ensure a fairer contribution from the finance industry to the public purse.

We need to reweight our markets in favour of longer-term investment and away from rewarding short-term speculation.[222] A FTT:

The FTT base should be as broad as possible to minimise avoidance issues and distortions across security classes and markets. The FTT should apply to all traded securities including equity, debt, currency, and commodities. The taxed securities should include spot and derivative transactions through exchanges and over the counter. However, the tax should not apply to new security issuances or offerings or financial services provided by financial institutions to customers.

The tax should be implemented at a low rate initially, with an agreed review period of five years. The tax should be a small impost of between 0.005 percent and 0.05 percent. Differential rates should be applied to instruments or asset classes to reflect the varying transaction costs and the extent to which the tax is intended to discourage trading in particular instruments or classes. The tax should be calculated on the notional values of the underlying security and should be adjusted for the term of the security.

The tax should be collected where possible by the relevant exchange or central clearing house. Its collection should be designed as a required part of the clearing process to minimise avoidance.[224] The cost of the tax should be shared between the buyer and seller.[225]
In an ideal world, the tax would be implemented across all jurisdictions. While the asymmetry of revenue across individual countries may be an issue,[226] the potential benefits of more stable, efficient and fair global markets and financial systems provide compelling drivers for the successful negotiation and implementation of this tax.

The reforms contained in the Dodd-Frank Act,[227] comprehensive as they are, will not fundamentally redirect market trading behaviour.[228] The Dodd-Frank reforms are a useful, but not sufficient, basis upon which to build markets that promote sound capital investment decisions and financial stability rather than the sort of devastating volatility we have seen recently.

We urge policy makers and regulators to act now to change the tide of capital market behaviour, because the longer the current trends continue, the more difficult it will become to restore the links between markets and society, and to ensure that capital markets are supporting rather than destabilising world economies. Rapid growth in the level of securities transactions has resulted in “staggeringly large” capital flows[229] and the associated market and financial system risks are mounting. “Carefully calibrated legal and tax infrastructure”[230] should be established now to ensure that policy makers are not required to react at the last minute to harmful capital flows.[231] The introduction of a low level global FTT as part of an integrated policy framework would promote greater alignment between capital market and economic activity to the real benefit of entire economies and the people who live in them.

* Professor of International Finance Law, Faculty of Law, University of New South Wales; Fellow, Asian Institute of International Financial Law, University of Hong Kong.
** Visiting Professorial Fellow, Faculty of Law, University of New South Wales. The authors would like to thank the Australian Research Council for the Discovery Grant that funded some of the research, Martin North for his invaluable feedback and Anita Wise for her excellent research assistance. All responsibility rests with the authors.
[2] Many countries previously had a financial transaction tax and a few continue to do so. See Thornton Matheson, International Monetary Fund, Taxing Financial Transactions: Issues and Evidence 7-8 (Working Paper WP/11/54, March 2011).
[3] As noted later in the article, critics of the tax also highlight potential revenue asymmetries across countries.
[4] INTERNATIONAL MONETARY FUND, A FAIR AND SUBSTANTIAL CONTRIBUTION BY THE FINANCIAL SECTOR FINAL REPORT FOR THE G-20 19 (June 2010),; European Commission, Innovative Financing at a Global Level 25 (Working Paper, SEC, 2010). Recent and ongoing regulatory reforms are likely to drive a significant portion of market trading previously transacted in the over-the counter markets through formal exchanges and clearing systems.
[5] European Commission, supra note 4, at 23.
[6] Jeff Salway, Banks Facing Demand for 20 bn [pd] From Robin Hood Tax Campaign, THE SCOTSMAN, June 7, 2011,
[8] EUROPEAN COMMISSION, THE MULTIANNUAL FINANCIAL FRAMEWORK 2014-2020: A BUDGET FOR EUROPE 2020 (June 29, 2011), See also Ralitsa Kovacheva, Pros and Cons of a European Tax on Financial Sector, EUINSIDE.EU, November 11, 2011. Many charitable and public policy organisations, such as Oxfam and the Gates Foundation, advocate a global FTT in order to raise funds for global poverty, developing country initiatives and/or climate change programmes. The revenue from the proposed EU tax is included as a resource in the European budget that will reduce Member States’ contributions. Use of some of the revenue for fighting climate change or as development aid is under consideration.
[9] EUROPEAN COMMISSION, PROPOSAL FOR A COUNCIL DECISION ON THE SYSTEM OF OWN RESOURCES OF THE EUROPEAN UNION 5 (EN Press Service 2011/0183 (CNS) June 29, 2011). See also CIDSE, Analysis of the European Commission Proposal for an EU0-Wide Financial Transaction Tax (Briefing Report, June 30, 2011),; Ian Traynor, EU Calls for “Tobin” Tax In a Move To Raise Direct Revenue, THE GUARDIAN, June 29, 2011,
[10] TEXT – G20 Finance Chiefs’ Communique, THOMSON REUTERS ONLINE, October 15, 2011.
[11] G20 Leaders Summit in Cannes: Final Communique, TELEGRAPH.CO.UK, November 6, 2011; Lesley Wroughton, G20 Fails to Endorse Financial Transaction Tax, REUTERS.COM, November 5, 2011.
[12] Rainier Buergin, Scaeuble Sees No Chance for Global Financial Transactions Tax, Bloomberg online, October 15, 2011.
[13] Parochialism Stopping Financial Transactions Tax – Schaeuble, DOW JONES NEWSWIRES, October 17, 2011
[14] Wroughton, supra note 11.
[15] See Peter Martin, New Global Financial Crisis Alert, SYDNEY MORNING HERALD, June 27, 2011,
[16] See RICHARD MIDDLETON & GERRY CROSS, ASSOCIATION FOR FINANCIAL MARKETS IN EUROPE, COMMISSION CONSULTATION ION TAXATION OF THE FINANCIAL SECTOR (Members’ Briefing Call, July 27, 2011). The briefing highlights an EU comment in October 2010 that “a financial transaction tax could be considered at the EU level only. However, it must be borne in mind that the financial industry is a global and interconnected one. Financial activities are concentrated in a small number of financial centres both inside and outside the EU which must compete on the world stage.”
[17] Matheson, supra note 2, at 19.
[18] Stephan Schulmeister, A General Financial Transactions Tax: A Short Cut of the Pros, the Cons and a Proposal 6 (Austrian Institute of Economic Research Working Paper No. 344, October 2009). The volume of financial transactions in Europe and the US is closer to 100 times nominal gross domestic product (GDP).
[19] A derivative is a financial instrument whose value depends on underlying variables.
[20] Schulmeister, supra note 18, at 5.
[21] Zsolt Darvas & Jakob von Weizsacker, Financial Transaction Tax: Small is Beautiful 4 (Economic and Scientific Policies, European Parliament Working Paper, February 2010).
[22] Darvas & Weizsacker, supra note 21, at 5. See Timothy Canova, Financial Market Failure as a Crisis in the Rule of Law: From Market Fundamentalism to a New Keynesian Regulatory Model 3 HARV. L. & POL’Y REV. 369, 388 (2009). See also, Paul Farrell, Derivatives the New “Ticking Bomb”: Buffett and Gross Warn: $516 Trillion Bubble is a Disaster Waiting to Happen, MARKET WATCH, March 10, 2008,
[23] Algorithmic trading uses high-speed computer programs to generate, route and execute orders. The Australian Securities and Investments Commission define algorithmic trading as “computer-generated trading activity where trading parameters are determined by strict adherence to a predetermined set of rules, aimed at delivering specific execution outcomes”: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION, MARKET ASSESSMENT REPORT: ASX GROUP 23 (Report 222 – November 2010). See also SECURITIES AND EXCHANGE COMMISSION, CONCEPT RELEASE ON EQUITY MARKET STRUCTURE 45 (17 CFR Part 242, Jan. 14, 2010); Australian Securities and Investments Commission, Australian Equity Market Structure ProposalS 21 (Consultation Paper 145, November 2010).
[24] Matheson, supra note 2, at 19. See also Sony Kapoor, Re-Define, Financial Transaction Taxes: Tools for Progressive Taxation and Improving Market Behaviour, 6 (February 2010), [hereinafter ‘Kapoor, Financial Transaction Taxes’]; Sony Kapoor, Re-Define, The Financial Crisis – Causes and Cures, 96 (2010), Kapoor highlights that a review of trading in Vodafone shares showed 90 trades and 72 changes to the price each minute of each day with most of this trading generated by automatic algorithms.
[25] Matheson, supra note 2, at 19.
[26] Matheson, supra note 2, at 19.
[27] Some parties estimate the cancellation rate at more than 90 percent: James Brigagliano, Co-Acting Director, Division of Trading and Markets U.S. Securities and Exchange Commission (SEC), Address at the Trader Forum Fall Workshop, (Oct. 8, 2009), in U.S. SECURITIES AND EXCHANGE COMMISSION, October 2009,
[29] T. Williams, Oh dear! I’m Queued! It’s Latency! (October 29, 2008),
[30] Darvas & Weizsacker, supra note 21, at 9.
[31] Kapoor, Financial Transaction Taxes, supra note 24, at 12. A large portion of the funding of global hedge funds is from wealthy individuals and families. Institutions are also increasingly investing in hedge funds as an alternative asset class.
[32] Kapoor, Financial Transaction Taxes, supra note 24, at 6.
[33] Kapoor, Financial Transaction Taxes, supra note 24, at 6.
[34] Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 619, 124 Stat. 1376, 1620–1631 (2010).
[36] FINANCIAL CRISIS INQUIRY COMMISSION, REPORT 47 (January 2011). Long-term Capital Management (LTCM) was a large hedge fund that amassed more than $1 trillion in the notional amount of OTC derivatives and $125 billion of securities on $4.8 billion of capital without the knowledge of its major derivatives counter parties or federal regulators. Greenspan testified to Congress that LTCM’s failure would potentially have had systemic effects; a default by LTCM would not only have had a significant distorting impact on market price but also in the process could have produced large losses, or worse, for a number of creditors and counter parties, and for other market participants who were not directly involved with LTCM.
[38] IOSCO, supra note 37, at 138.
[39] Kapoor, Financial Transaction Taxes, supra note 24, at 6.
[40] Eichengreen et al, supra note 35.
[41] IOSCO, supra note 37, at 138.
[42] JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY 156 (1936). Many believe that James Tobin, an economist who proposed a small tax on foreign currency transactions to reduce the level of trading and volatility in exchange rate markets, was the initial proponent of a FTT. While there are similarities between Tobin’s aims and arguments to alter trading behaviour in foreign exchange markets and those that apply to a financial transaction tax, there are also major differences in the content and effects of the two taxes: James Tobin, A Proposal for International Monetary Reform, 4 EAST. ECON. J. 153 (1978).
[43] KEYNES, supra note 42, at 156.
[44] Joseph Stiglitz, Using Tax Policy to Curb Speculative Short-Term Trading, 3 J. FIN. SERV. RESEARCH 101, 109 (1989). See also Lawrence Summers & Victoria Summers, When Financial Markets Work Too Well: A Cautious Case For a Securities Transaction Tax, 3 J. FIN. SERV. RESEARCH 261, 263 (1989). Summers & Summers express concerns about excessive volatility in markets caused by destabilising speculation, the diversion of human and capital resources away from more socially profitable pursuits into the financial sphere, and the impact of rapid financial turnover on the way in which corporate investment decisions are made.
[45] Re-Define describes itself as a non-partisan international Think Tank that advises key policy-makers on reforming the financial system, formulating economic policy, improving governance and driving sustainable development. The Re-Define Advisory and Expert Committee includes: Sony Kapoor; Vinash Persaud, former Managing Director State Street Bank, head of Research UBS, Chairman of Intelligence Capital; Henrik Enderlien, Prof Political Economy and Assoc Dean at the Hertie School of Governance; John Fullerton, President Capital Institute and ex Managing Director, JP Morgan; Stephen Spratt, Research Fellow, IDS Sussex; Perry Mehling, Prof of Economics, Barnard College, Columbia University; Amit Seru, Asst Prof of Finance, University of Chicago; Sebastian Dullien, Co-Director, Centre for Excellence on Money, HTW Berlin; Simon Pak, Assoc Prof of Finance, Penn State University; Thorsten Beck, Prof Economics, University of Tilburg; Michael Hoffman, former Director General, German Development Ministry, currently Executive Director World Bank; Rob Johnson, former Managing Director, Soros Fund Management, and Chief Economist Senate Banking Committee; Damon Silvers, Member, Congressional Oversight Panel on TARP and Head of Policy, AFL-CIO; Chris Rose, former Vice President Goldman Sachs and COO of several Hedge Funds; Jose Antonio Ocampo, former Under Secretary General of the UN, currently Professor Columbia University; Stephanie Griffiths Jones, Director Institute for Policy Dialogue, Columbia University; Meenoo Kapoor, former Director of Finance & Financial Controller at several MNCs operating in India; Patrick Diamond, Research Fellow University of Oxford; Richard Werner, Chair Empirical Macroeconomics, Goethe University Frankfurt; Mike Masters, Managing Member Masters Capital and Founder Better Markets; Robert Wade, Professor of Development Studies, London School of Economics; David Webb, Head of the Finance Department, London School of Economics, available at:
[46] See Center for Economic and Policy Research, Support for A Financial Transactions Tax (FTT), (Jan. 2010),
[47] Stiglitz, supra note 44, at 109; Summers & Summers, supra note 44, at 270; Dean Baker, Center for Economic and Policy Research, The Benefits of a Financial Transaction Tax (Dec. 2008),; Margaret Blair, Financial Innovation and the Distribution of Wealth and Income 29 (Vanderbilt University Law School, Working Paper 10-32, June 2010); FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at 64-65.
[49] Angela Monaghan, Tax “Socially Useless” Banks, Says FSA Chief Lord Turner, THE TELEGRAPH, August 27, 2009,
[50] Adair Turner, Address at the City Banquet, The Mansion House, London (September 22, 2009).
[51] Heather Stewart, World Economists Urge G20 Ministers to Accept Robin Hood Tax, GUARDIAN, April 13, 2001, The signatories are available at
[52] The letter is available at
[53] See, eg, International Monetary Fund, supra note 4; European Commission, supra note 4. See also Financial Services Authority, The Turner Review: A Regulatory Response To The Global Banking Crisis (March 2009) <> .
[54] European Commission, supra note 4, at 15-16.
[55] European Commission, supra note 4, at 23. The European Commission Report notes that the effects of a decline in transactions and liquidity remain subject to debate and suggests these effects may depend on the microstructure of markets. It cites the following studies: Katiuscia Mannaro et. al., Using an Artificial Financial Market for Assessing the Impact of Tobin-like Transaction Taxes, 67 J. ECON. BEHAV. & ORG. 445 (2008); Paolo Pellizzari & Frank Westerhoff, Some Effects of Transaction Taxes under Different Microstructures (Quantitative Finance Research Centre Research Paper 212, University of Technology Sydney, December 2007).
[56] European Commission, supra note 4, at 23.
[57] European Commission, supra note 4, at 24.
[58] European Commission, supra note 4, at 24.
[59] European Commission, supra note 4, at 25.
[60] European Commission, supra note 4, at 25-26.
[61] European Commission, supra note 4, at 24.
[62] European Commission, supra note 4, at 26.
[63] European Commission, supra note 4, at 22.
[64] European Commission, supra note 4, at 24.
[65] European Commission, supra note 4, at 24.
[66] European Commission, supra note 4, at 24.
[67] European Commission, supra note 4, at 24.
[68] EUROPEAN COMMISSION, supra note 8.
[69] EUROPEAN COMMISSION, supra note 9, at 5.
[70] EUROPEAN COMMISSION, supra note 9, at 5.
[71] EUROPEAN COMMISSION, supra note 9, at 5.
[72] Quentin Peel & Gerritt Wiesmann, Schauble Calls for EU Lead on Tobin Tax, FT.COM, October 31, 2011; Robert Preston, How Scary is a Financial Transaction Tax?, BBC News, BBC.CO.UK, October 10, 2011. The German Finance Minister, Wolfgang Schauble, has indicated that if agreement cannot be reached between the 27 eurozone countries, the EC will consider introducing it initially in some member states.
[73] INTERNATIONAL MONETARY FUND, supra note 4, at 9.
[74] INTERNATIONAL MONETARY FUND, supra note 4, at 19.
[75] INTERNATIONAL MONETARY FUND, supra note 4, at 19-20.
[76] INTERNATIONAL MONETARY FUND, supra note 4, at 19.
[77] INTERNATIONAL MONETARY FUND, supra note 4, at 20.
[78] INTERNATIONAL MONETARY FUND, supra note 4, at 20-21.
[79] INTERNATIONAL MONETARY FUND, supra note 4, at 58.
[80] INTERNATIONAL MONETARY FUND, supra note 4, at 21.
[81] INTERNATIONAL MONETARY FUND, supra note 4, at 21.
[82] INTERNATIONAL MONETARY FUND, supra note 4, at 21.
[83] INTERNATIONAL MONETARY FUND, supra note 4, at 5, 14.
[84] INTERNATIONAL MONETARY FUND, supra note 4, at 4, 22.
[85] INTERNATIONAL MONETARY FUND, supra note 4, at 23.
[86] Matheson, supra note 2, at 10-11.
[87] Matheson, supra note 2. Matheson defines a financial transaction tax on page 5 as a “securities transaction tax that applies to all or certain types of securities (equity, debt and their derivatives).”
[90] Matheson, supra note 2, at 19.
[91] Matheson does not explain the economic theory he refers to.
[92] Matheson, supra note 2, at 19.
[93] Matheson, supra note 2, at 20.
[94] Matheson, supra note 2, at 19-20.
[95] Matheson, supra note 2, at 14-15. Matheson cites the following studies: JULIAN MCCRAE, THE IMPACT OF STAMP DUTY ON THE COST OF CAPITAL (Institute for Fiscal Studies mimeo, 2002); Steven Umlauf, Transaction Taxes and the Behaviour of the Swedish Stock Market, 33 J. FIN. ECON. 227 (1993) (Umlauf found the Swedish market declined by 5.3 percent in the 30 days prior to the imposition of a one percent tax on equity trades tax in 1983); Shing-yang Hu, The Effects of the Stock Transaction Tax on the Stock Market – Experience from Asian Markets, 6 PAC. BASIN FIN. J. 347 (1998)(Hu found a 23 percent increase in transaction costs across various Asian markets caused a one percent decline in daily market returns); OXERA, STAMP DUTY: ITS IMPACT AND THE BENEFITS OF ITS ABOLITION (May 2007)(Oxera estimates that the abolition of the 0.5 percent stamp duty in the UK would increase share prices by 7.2 percent and reduce the cost of capital by 66-80 basis points); G. William Schwert & Paul Seguin, Securities Transaction Taxes: An Overview of Costs, Benefits and Unresolved Questions, 49 FIN. ANAL. J. 27 (1993)(Schwert and Seguin estimate that a 0.5 percent FTT in the US, a tax 10 times higher than the one commonly considered, would increase cost of capital by 10-180 basis points).
[96] Matheson, supra note 2, at 14. Matheson notes that investors place a valuation premium of 20-25% on publicly traded firms in comparison to illiquid privately held companies. This example is the most extreme possible in terms of the comparative liquidity of securities.
[97] Matheson, supra note 2, at 14. In 2009, the average holding period for stocks in the Standard and Poors 500 stock index was three and a half months, down from 20 months in 1990.
[98] Matheson, supra note 2, at 115-16.
[99] Matheson, supra note 2, at 15. Matheson cites the following studies: Steve Bond et al., Stamp Duty on Shares and its Effect on Share Price (Institute for Fiscal Studies, London Working Paper WP04/11, 2004)(by Bond et al that found that a 50 percent cut in stamp duty in the United Kingdom in 1986 resulted in higher price increases in the shares with higher turnover); G. AUTEN & T. MATHESON, THE MARKET IMPACT AND INCIDENCE OF A SECURITIES TRANSACTION TAX: THE CASE OF THE U.S. SEC LEVY (2010) (Auten and Matheson found evidence that a low rate transaction tax levied by the United States (US) Securities and Exchange Commission reduced trading in only the largest, most liquid US Equities). Matheson suggests these study results support the finding by Amihud and Mendelson’s that investors specialise in trading assets suited to their time horizons: Yakov Amihud & Haim Mendelson, Asset Pricing and the Bid-Ask Spread, 17 J. FIN. ECON. 223 (1986).
[100] John Pender, Incentive Structures Still Favour Risk-Taking, FT.COM, October 25, 2011. Pender points out that most fund managers are subject to three-moth performance measures encouraging them to resort to herding and momentum trading to minimise their own business and career risks.
[102] Matheson, supra note 2, at 13.
[103] Matheson, supra note 2, at 13-14.
[104] Matheson, supra note 2, at 17-18. The studies calculate elasticities relating to changes in taxes, bid-ask spreads and total transaction costs.
[105] Matheson, supra note 2, at 18.
[106] RODNEY SCHMIDT, THE CURRENCY TRANSACTION TAX: RATE AND REVENUE ESTIMATES (Oct. 2007). In contrast, studies on the FTT in Sweden found a massive shift in trading volumes because of the high tax rate and narrow base of the Swedish market: Umlauf, supra note 95.
[107] Matheson, supra note 2, at 16, citing Amihud & Mendelson, supra note 99; Paul Kupiec, Noise Traders, Excess Volatility, and a Securities Transaction Tax, 10 J. FIN. SERV. RESEARCH 115 (1996).
[108] Matheson, supra note 2, at 16, citing Kenneth Froot & Andre Perold, New Trading Practices and Short-Run Market Efficiency, 15 J. FUTURES MARKETS 731 (1995); Alex Frino & Andrew West, The Impact of Transaction Costs on Price Discovery: Evidence from Cross-Listed Stock Index Futures Contracts, 11 PAC. BASIN FIN. J 139 (2003).
[109] Matheson, supra note 2, at 16, citing Avanidhur Subrahmanyam, Transaction Taxes and Financial Market Equilibrium, 71 J. BUS. 81 (1998); Dominique Dupont & Gabriel Lee, Effects of Securities Transaction Taxes on Depth and Bid-Ask Spreads (2007) 31 ECON. THEORY 393.
[110] Schulmeister, supra note 18, at 5; Matheson, supra note 2, at 19.
[111] See, eg, Darvas & Weizsacker, supra note 21, at 5; Matheson, supra note 2, at 15-16.
[112] The bid-ask spread is the amount by which the ask price exceeds the bid. More specifically, it is the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.
[113] Bradford Cornell & Erik Sirri, The Reaction of Investors and Stock Prices to Insider Trading, 47 J. FIN. 1031, 1055 (1992); Raymond Fishe & Michael Robe, The Impact of Illegal Insider Trading in Dealer and Specialist Markets: Evidence From a Natural Experiment, 71 J. FIN. ECON. 461, 461-462, 481 (2004).
[114] Allaudeen Hameed et al., Stock Market Declines and Liquidity, 65 J. FIN. 257, 291 (2010).
[115] Hameed et al., supra note 114, at 291.
[117] Summers & Summers, supra note 44, at 274.
[118] EHRHARDT, supra note 89, at 126.
[119] Matheson, supra note 2, at 18, citing Shinhua Liu, Securities Transaction Tax and Market Efficiency: Evidence from the Japanese Experience, 32 J. FIN. SERV. RESEARCH 161 (2007); Badi Baltagi et al., Transaction Tax and Stock Market Behaviour: Evidence from an Emerging Market, 31 EMPIRICAL ECONOMICS 393 (2006).
[120] Matheson, supra note 2, at 20.
[121] Matheson, supra note 2, at 20. Matheson cites J Bradford De Long et al., Noise Trader Risk in Financial Markets, 98 J. POL. ECON. 703 (1990); Kenneth Froot et al., Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation, 47 J. FIN. 1461 (1992); Frank Song & Junxi Zhang, Securities Transaction Tax and Market Volatility, 115 ECON. J 1103 (2005); Pellizzari & Westerhoff, supra note 55.
[122] Matheson, supra note 2, at 21. Matheson cites Richard Roll, Price Volatility, International Market Links, and Their Implications for Regulatory Policies, 3 J. FIN. SERV. RESEARCH 211 (1989) (Roll found no consistent relationship between transaction costs and volatility across 23 countries); Baltagi et al., supra note 119 (Baltagi and others found that a FTT in China had no impact on volatility); Charles Jones & Paul Seguin, Transaction Costs and Price Volatility: Evidence from Commission Deregulation, 87 AM. ECON. REV. 728 (1997) (Jones and Seguin found that stock commission deregulation in the US led to a decline in transaction costs and decreased price volatility); Harold Hau, The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse, 4 J. EUR. ECON. ASS’N 862 (2006) (Hau found that a reduction in the tick price lead to a fall in volatility); Christopher Green et al., Regulatory Lessons for Emerging Stock Markets from a Century of Evidence on Transaction Costs and Share Price Volatility in the London Stock Exchange, 24 J. BANKING & FIN. 577 (2000) (Green and others found that increases in stamp duty in the UK generally led to higher short-term price volatility).
[123] Kenneth French & Richard Roll, Stock Return Variances, 17 J. FIN. ECON. 5 (1986).
[124] Matheson, supra note 2, at 21. Matheson cites French et al., supra note 123.
[125] When there is extensive short-term trading, a change in a security price from 99 to 100 may involve many trades at minute increments.
[126] Kapoor, Financial Transaction Taxes, supra note 24.
[127] Robert Pollin et al., Securities Transaction Taxes for U.S. Financial Markets, 29 EASTERN ECON. J. 527, 533 (2003). Pollin et al argue that market volatility is influenced by three partially independent influences: the underlying behaviour of the nonfinancial economy; the herd behaviour of financial market participants; and the attempt by participants to dig out of financial crises once they have already occurred. They suggest that a FTT should moderate the first two sources of volatility through a decline in liquidity, while the third source would be exacerbated by a decline in liquidity.
[128] See, eg, Franklin Allen & Douglas Gale, Bubbles and Crises, 110 ECON. J. 236 (2000); Gadi Barlevy, A Leverage-based Model of Speculative Bubbles (Federal Reserve Bank of Chicago, Working Paper No. 2008-01, Aug. 28, 2009).
[129] Matheson, supra note 2, at 21. Matheson cites Allen & Gale, supra note 128; CARMEN REINHART & KENNETH ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY (2009); GEORGE AKERLOF & ROBERT SHILLER, ANIMAL SPIRITS: HOW HUMAN PSYCHOLOGY DRIVES THE ECONOMY, AND WHY IT MATTERS FOR GLOBAL CAPITALISM (2008); Tobias Adrian & Hyun Song Shin, The Shadow Banking System: Implications for Financial Regulation, 13 FIN. STABILITY REV. 1 (2009); Barlevy, supra note 128; John Geankoplos, Solving the Present Crisis and Managing the Leverage Cycle (Cowles Foundation Discussion Paper No 1751, Yale University, January 2010).
[130] Matheson, supra note 2, at 22.
[131] Matheson, supra note 2, at 22. Matheson cites Thomas Gehrig & Lukas Menkhoff, Extended Evidence on the Use of Technical Analysis in Foreign Exchange, 11 INT’L J. FIN. ECON. 327 (2007).
[132] Matheson, supra note 2, at 22. Matheson cites Froot et al., supra note 121.
[133] Matheson, supra note 2, at 22.
[134] See Matheson, supra note 2.
[135] See, e.g. FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36.
[136] FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at xxi.
[137] Mary Schapiro, “US Equity Market Structure” 11 (Testimony Before the Subcommittee On Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs and the United States Senate Permanent Subcommittee on Investigations, December 8 2010); Australian Securities and Investments Commission, Australian Equity Market Structure Report 215 91 (November 2010).
[138] EICHENGREEN & MATHIESON, supra note 35.
[139] Schapiro, supra note 137, at 7.
[140] See, eg, IOSCO, REPORT ON OTC DERIVATIVES DATA REPORTING AND AGGREGATION REQUIREMENTS CONSULTATIVE REPORT 26 (August 2011); Schapiro, supra note 137. The IOSCO Report confirms at page 26 that there is an international effort underway to promote a consistent international framework for the regulation of OTC derivatives transactions, based on cooperation between national authorities. This framework includes efforts to aggregate OTC derivatives data. Schapiro indicates that the SEC is focused on obtaining the tools and resources necessary to better surveil trading, inspect regulated entities, and enforce the rules in today’s highly automated, high speed and high volume markets.
[141] Monaghan, supra note 49.
[142] See, eg, Matheson, supra note 2, at 19.
[144] See, e.g., Mark Carhart, On Persistence in Mutual Fund Performance, 52 J. FIN. 57 (1997); Jeffrey Busse et al., Performance and Persistence in Institutional Investment Management, 65 J. FIN. 765 (2010).
[145] Stiglitz, supra note 44, at 109.
[146] Stiglitz, supra note 44, at 103.
[147] Darvas & Weizsacker, supra note 21, at 5.
[148] Gill North & Ross Buckley, A Fundamental Re-examination of Efficiency in Capital Markets in Light of the Global Financial Crisis[2010] UNSWLawJl 30; , 33 UNSW L. J. 714 (2010).
[149] See Part V section B 4 of the article.
[150] Summers & Summers, supra note 44, at 272.
[151] Marcel Kahan, Securities Law and the Social Costs of “Inaccurate” Stock Prices, 41 DUKE L.J. 977, 981, 987 994-1043 (1992).
[152] Julian Du & Shang-jin Wei, Does Insider Trading Raise Market Volatility?, 114 ECON. J. 916, 916, 940, 940 (2004).
[153] Cornell & Sirri, supra note 113, at 1055; Fishe & Robe, supra note 113, at 461-462, 481. See also Utpal Bhattacharya et al., The World Price of Earnings Opacity, 78 ACCOUNTING REV. 641 (2003); Laura Beny, Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence, 7 AM. L & ECON. REV. 144 (2005); Laura Beny, Insider Trading Law and Stock Markets Around the World: An Empirical Contribution to Theoretical Law and Economics Debate, 32 J. CORP. L. 237 (2007).
[154] FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at xxii.
[155] Schapiro, supra note 137, at 2-3. See also Gill North, Structural Developments in Global Capital Markets: Promoting Efficiency or A Risky & Unstable Mathematical Playground? (Working Paper, UNSW, September 2011).
[156] See, e.g. Heather Stewart, Without a Return to Growth, the Western Economies, SYDNEY MORNING HERALD, July 4, 2011, at 8. Stewart cites Robert Shiller.
[157] Matheson, supra note 2, at 37.
[158] Matheson, supra note 2, at 38. The assumptions and methodologies underlying these conclusions are not provided.
[159] Matheson, supra note 2, at 37.
[160] Matheson, supra note 2, at 5.
[161] Umlauf, supra note 95.
[162] John Brondolo, Taxing Financial Transactions: An Assessment of Administrative Feasibility (August 2011).
[163] Brondolo, supra note 162, at 5.
[164] Brondolo, supra note 162, at 5-6. The IMF paper highlights the challenges linked to: constant innovation in financial instruments, potentially allowing opportunities for tax avoidance; the continuing growth in the volume of financial transactions; and the increasing globalisation of financial markets.
[165] Brondolo, supra note 162, at 45.
[166] Brondolo, supra note 162, at 18. For example, the UK stamp tax is chargeable on a transaction carried out either in the UK or overseas. To ensure some tax is collected on the international transactions, a higher rate of 1.5 percent is imposed when shares enter a depositary receipt issuer arrangement or a clearance service system.
[167] Brondolo, supra note 162, at 12.
[168] Brondolo, supra note 162, at 12-13.
[169] Brondolo, supra note 162, at 13-14, 27. The notional value is the value of a derivative's underlying assets at the spot price. For instance, in the case of an options or futures contract, it is the number of units of an asset underlying the contract, multiplied by the spot price of the asset.
[170] Brondolo, supra note 162, at 13-14.
[171] Brondolo, supra note 162, at 26, 28.
[172] Brondolo, supra note 162, at 13-14.
[173] For example, Switzerland levies a stamp transfer tax on financial instruments including some OTC instruments. This tax is collected through securities dealers including broker-dealers, banks and companies with significant security holdings on their balance sheet.
[174] Brondolo, supra note 162, at 30.
[175] TEXT – G20 Finance Chiefs’ Communique, supra note 10.
[176] G20 Leaders Summit in Cannes: Final Communique, supra note 11; Wroughton, supra note 11.
[177] Mike Peacock, G20 Discuss Transaction Tax, Little Hope of Progress, THOMSON REUTERS ONLINE, October 14, 2011. See also Rebecca Christie, US, EU to Pursue Bank Levies in “Their Own Way,” U.S. Says, BLOOMBERG, November 3, 2011. George Osbourne, the Chancellor of the Exchequer in the United Kingdom, also confirmed that the necessary international consensus does not exist to implement a tax globally.
[178] Peacock, supra note 177.
[179] Christie, supra note 177. See also Wroughton, supra note 11. The White House deputy national security adviser Michael Forman told reporters in Paris that President Obama shares the objectives that Chancellor Merkel and President Sarkozy have in ensuring that the financial sector contributes an appropriate share to the resolution of the crisis. However, the Administration has proposed one approach to that, through the financial crisis responsibility fee. The Europeans have another approach. But see Melanie Waddell, Lawmakers Push Financial Transaction Tax as Deficit Deadline Nears, ADVISORONE, November 11, 2011. Two Democratic representatives in the US, Senator Tom Harkin and Representative Peter De Fazio, have introduced a bill (the Wall Street Trading and Speculators Tax Act introduced November 2, 2011) to impose a financial transaction tax. They point out in a letter to the Joint Select Committee on Deficit Reduction that the tax would raise over $40 billion annually.
[180] Louise Armistad, European Politicians Plot to Block UK Veto on “Tobin Tax”, TELEGRAPH.CO.UK, October 6 2011.
[181] Kovacheva, supra note 8. Osborne indicates that he introduced a bank levy in the United Kingdom because this is a tax paid by the banks and their shareholders. However, as noted in Part V section 8 of this article, the ability of the banks to pass on the cost of either a levy or tax to their customers depends on market conditions and competitive factors.
[182] EU Calls for Global Tax, Canada Says Can Block It, THOMSON REUTERS, October 5, 2011.
[183] Kavaljit Singh, Amidst Backdrop of #OWS Protest, Group of 20 (G20) Defers Decision on a “Global Financial Transaction Tax” (FTT), GLOBAL RESEARCH.CA, October 17, 2011.
[184] EU Calls for Global Tax, Canada Says Can Block It, THOMSON REUTERS, October 5, 2011
[185] Andrew Hickey, Industry Urges Osborne to Quash FTT Talk, Global Financial Strategy, GFSNEWS.COM, October 25, 2011.
[186] Perhaps these parties are suggesting that the profits gained from proprietary trading are required to sustain the required capital base of the commercial banks – a problematic proposition given the risks inherent in the trading.
[187] These entities will naturally oppose policy measures that might restrict or reduce future growth and profits.
[188] See, eg, FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at 64-65. The Financial Crisis Inquiry Commission Report and scholars highlight that from the 1980s the financial sector in the US grew much faster than the general economy – rising from about 5% of gross domestic product to around 8% in 2007. In addition, financial sector profits grew from around 15% of corporate profits in 1980 to a peak 33% in 2003 and around 27% in 2006.
[189] FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at 62-63. See also Blair, supra note 47; James Politi, Income of Richest US Households Soars, FT.COM, October 25, 2011. In October 2011, a non-partisan US Congressional Budget Office report indicated that after-tax household incomes grew by 275 percent for the richest 1 percent between 1979 and 2007. In contrast, after-tax income rose 65 percent for the top 20 percent of Americans, less than 40 percent for the top 60 percent, and 18 percent for the poorest 20 percent.
[190] See, eg, INTERNATIONAL MONETARY FUND, supra note 4, at 32-36. The IMF Report outlines the amounts provided by governments as direct support to the financial sector during 2009. The Report also estimates the associated economic costs.
[191] European Commission, supra note 4, at 24.
[192] See, eg, David Gow, Germany and Spain Hit Back at Critics of Eurozone Debt Strategy, GUARDIAN.CO.UK, October 14 2011; Mark Schoeff Jr. Financial Transaction Tax Maybe on Senate’s Agenda, PENSION & INVESTMENTS, October 25, 2011 available at The reasons for the US’s opposition to the FTT are not clear.
[193] Gow, supra note 192. Merkel was speaking at a conference of the engineering trade union IG Metall in Karlsruhe.
[194] Buergin, supra note 12.
[195] Parochialism Stopping Financial Transactions Tax – Schaeuble, DOW JONES NEWSWIRES, October 17, 2011
[196] Louise Armistad, European Politicians Plot to Block UK Veto on “Tobin Tax”, TELEGRAPH.CO.UK, October 6 2011.
[197] Peel et al, supra note 72; Peacock, supra note 177.
[198] See, e.g. FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at xxi, 52.
[199] Alex Erskine, Australian Securities and Investments Commission, Rethinking Securities Regulation After the Crisis: an Economics Perspective 9 (Working Paper, July 9, 2010).
[200] Erskine, supra note 199, at 4-5.
[201] REINHART & ROGOFF, supra note 129. The Reinhart and Rogoff book discusses financial crises over the last four centuries. They award their booby prize to the theorists who argued prior to the GFC that their models indicated that US foreign assets were actually far larger than the official estimates.
[202] Most of the regression based empirical research, which examines specific efficiency characteristics and determinants, does not comment on efficiency effects across an entire market or economy because of the difficulties or dangers in dong so. The endogeneity of the variables means that tests designed to measure efficiency determinants over the entire market are inherently ambiguous. That is, the efficiency proxies are interrelated and it is often not possible to accurately separate out and “test” for all efficiency effects across a full market on a controlled basis.
[203] See FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at 44. The Financial Crisis Inquiry Commission Report notes that the “increasing dependence on mathematics let the quants create more complex products and let their managers say, and maybe even believe, that they could better manage those product’s risks ... But models relied on assumptions based on limited historical data... the models would turn out to be woefully inadequate. And modelling human behaviour was different from the problems the quants had addressed in graduate school.”
[204] Matheson, supra note 2, at 20.
[205] Matheson, supra note 2, at 20.
[206] Matheson, supra note 2, at 20.
[207] See Matheson, supra note 2, at 20.
[208] Matheson, supra note 2, at 20.
[210] See, e.g. Lawrence Mitchell, The Morals of the Marketplace: A Cautionary Essay for Our Time, 20 STAN. L & POL’Y REV. 171, 192 (2009).
[211] Major reviews of the GFC conclude that the crisis was due to human error and that actions could have been taken to prevent or to mitigate the negative effects. See, e.g. FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36.
[212] FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36. As Dean Baker said of the years before the GFC, “[t]here were a lot of things that didn’t require any investigation at all; these were totally available in the data.”
[213] See, e.g. US FINANCIAL STABILITY OVERSIGHT COUNCIL, supra note 209, at iv.
[214] FINANCIAL CRISIS INQUIRY COMMISSION, supra note 36, at xxii.
[215] Ronald Arculli, Chairman Hong Kong Exchange, The Role of Exchanges in the New Economic Order, World Federation of Exchanges,
[216] Ian Katz & Rebecca Christie, Volcker Rule Should be Robust, Financial Oversight Panel Says, BLOOMBERG, Jan. 19, 2011,
[217] Ben Bernanke, The Subprime Mortgage Market, Address at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago (May 17, 2007).
[218] Edmund Andrews, Fed and Regulators Shrugged as the Subprime Crisis Worsened, N.Y TIMES, December 18, 2007, at A1.
[219] Most developed nations continue to aspire to become major centres that attract global financial transactions. See, e.g. Chancellor George Osborne’s Mansion House Speech, THE TELEGRAPH, June 15, 2011; Australia On Track As Finance Hub: Shorten, SYDNEY MORNING HERALD, May 28, 2011.
[220] UN Asks G20 to Deliver “Bold Solutions” to Popular Protests, MENAFN.COM, October 26, 2011
[221] Caroline Copley, G20 Leaders Must Compromise to Solve Crisis – U.N.’s Ban, THOMSON REUTERS ONLINE, October 17 2011.
[222] The Aspen Institute, A Call to Action (Sept. 9, 2009),
<> .
[223] Some countries are already doing this.
[224] Pollin et al., supra note 127, at 542.
[225] See European Commission, supra note 4, at 19. The report indicates that collecting taxes through central clearing mechanisms is straightforward and cheap.
[226] Schulmeister, supra note 18. More than ninety seven percent of the EU spot and derivative transactions currently occur in the UK and Germany. Elsewhere a large portion of the trading occurs in the US.
[227] Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 619, 124 Stat. 1376, 1620–1631 (2010).
[228] Gill North & Ross Buckley, The Dodd–Frank Wall Street Reform and Consumer Protection Act: Will Require a Change in Regulatory Culture and Mindset to be Effective 35(2) MELBOURNE U. L. REV. (forthcoming 2011).
[229] See Martin, supra note 15.
[230] Joe Leahy, Don’t Improvise Capital Controls, IMF Says, FINANCIAL TIMES May 29, 2011,
[231] Leahy, supra note 230.

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