Italy will on Monday become the first country to introduce a tax on high-frequency trading in a move that has become a test case for potential further crackdowns on the controversial practice.
The country will introduce levies against high-speed trading and equity derivatives in the final part of a two-stage process established this year to tax equity-related transactions.
The Italian version explicitly focuses on high-frequency trading and derivatives, which are often used by corporations and banks to hedge against risk. The tax will also apply regardless of where the transaction is executed, or the country of residence of the counterparty.
Banks and brokers – many of whom were scrambling on Friday for clarification of key details – have warned the new taxes could further damage liquidity in the Italian market. Volumes have fallen sharply since the introduction of a tax on equities in March.
For high-frequency traders, order changes and cancellations will be taxed at 0.02 per cent when they occur within a timeframe shorter than half a second, once above a threshold. There will be fixed charges for equity derivatives, depending on the type of contract, and deals executed off-exchange will subject to a higher tax band.
Intermediaries such as market makers are exempt from the tax.