Dark Pools, High-Frequency Trading, and the Financial Transaction Tax: A Solution or Complication?

Abstract

The implementation of a financial transaction tax has been the subject of debate for many years. Countries all across the globe have enacted various types of this tax and have seen different results depending upon factors such as the rate and the types of financial instruments affected by it. With the recent explosion of high-frequency transactions, discussion of enacting a financial transaction tax has begun to grow in both Europe and the United States.

This Article will look at the possible effects of enacting a financial transaction tax on the U.S. marketplace. Before this type of tax is put into place, we must first analyze what the results of previous experiences were, what results could be expected from an implementation in the United States, and whether these results align with the basic goals of taxation.

The idea of a financial transaction tax has recently been paired with the idea of regulating Wall Street. However, while the tax may assist to an extent in regulating the marketplace, it should not be viewed in this regard, but instead mainly as a tool to raise revenue. There may be adverse effects of such a tax in the short-term, but the true impact on the market should be viewed in respect to the long-term outcomes. Additionally, while transparency and stability are important in the marketplace, an over-regulation of high-frequency trading, and specifically the dark-pool market in which the exchanges occur, could end up distorting the market and eliminating investment volume.

Overall, the implementation of a financial transaction tax may prove beneficial to the United States in raising revenue in the long-term but not as a regulatory device in the marketplace.

Keywords: Taxation, Dark Pools, High Frequency Trading, Financial Transaction Tax, Capital Markets

JEL Classification: H2, H21, H25, H20, K34, G1, G15, G28, N2, N20, E62