Should it ever need avoiding, it’s shockingly easy to avoid the EU’s transaction tax.
Merkel’s proposal for a EU-wide transaction tax got a lot of attention recently but don’t worry, nothing’s happening yet.
Background: Right now, Merkel is pushing for a EU-wide transaction tax. Markus Henn, a markets expert for Weed e.V. in Germany, tells us that it will probably be around 0.01% of the transaction, because on the website of the finance ministry, they take the figures of the Austrian Institute for Economic Research: an amount of up to 11 billion Euros for 0.01%. So those numbers suggested by the Austrian Institute seem to be those that Germany most relates to.
“I think history has shown that transaction taxes on stock trades are always ill-advised.”
So it probably won’t happen, but in case a transaction tax ever does become an issue, here’s how traders will be able get around it. In short: derivatives.
A high frequency trader (who we won’t name) explained to us how it works. Market makers will (most likely) not have to pay the transaction tax. (To keep liquidity in the market, regulators have to offer some incentive for firms to make markets.)
So the market-making firms (Morgan Stanley, JPMorgan, etc) will then be able to create a swap for investors who want to trade the synthetic market for the underlying product.
Because the tax only exists on the product itself, not on a swap, any investor who buys the swap will simply not have to pay the tax.
So to avoid it, just trade swaps through a broker who is designated a market maker.