Does financial transaction tax (FFT) debilitate high frequency trading?

Question

In Taiwan there is a FFT of 0.3% on equity sell, and coincidentally HFT seemed to be non-existent in Taiwan market. HFT features high volumes of trades, does the tax make HFT infeasible?

Answer 1

Yes. A financial transaction tax can make many forms of high-frequency trading (HFT) economically infeasible because HFT typically earns a very small profit per trade and relies on executing a huge number of trades.

For example, suppose an HFT strategy expects to earn 0.05% on a trade. If selling the stock incurs a 0.3% transaction tax, the tax alone exceeds the expected trading profit:

0.05%−0.30%=−0.25%.0.05\%-0.30\%=-0.25\%.The trader would lose money before considering commissions, bid-ask spreads, and other costs.

However, it would be too strong to say that the tax necessarily eliminates all HFT. The effect depends on the strategy, applicable exemptions, market structure, and the exact tax rules. In general, though, a transaction tax raises the minimum profit required per trade and disproportionately discourages very high-turnover, low-margin strategies, which are characteristic of HFT.