Investment Operations

Greenwich: Investors Fear Negative Impact from a Financial Transaction Tax


72% of market participants expect harm to retail investors and trading; 65% fear negative impact on personal portfolios; 70% anticipate reduction in their firm’s trading

As the unexpected impact of the COVID-19 pandemic continues its negative effect on tax revenue, several European nations are reconsidering use of a financial transaction tax (FTT). In the U.S., with the presidential election fast approaching, the debate around an FTT has been resurrected, worrying financial professionals, investors and retirement beneficiaries.

In order to pinpoint the market’s views, Greenwich Associates interviewed 58 market professionals regarding the potential impacts of an FTT, drawing from a variety of firms, including retail brokers, wealth managers, asset managers, regulators, banks, hedge funds, broker dealers and consultants. The majority of respondents were based in the U.S. with responses also coming from EMEA and APAC.

The results, published this week in a new Greenwich Report, “Financial Transaction Tax – What is it Good For?, show that investors have strong concerns about the negative impacts that a potential FTT could have on liquidity, market quality and retirement savings. For example, while FTT supporters argue that adding a small charge to financial transactions can help the government raise funds for a bevy of social programs, past FTT efforts failed to raise the funds projected and had unexpected consequences, such as shrinking trading volume, falling market share and migrating of capital market activities to other market centers.

The author of the report, Senior Analyst Shane Swanson, in the Market Structure and Technology Group at Greenwich Associates, says nearly 70% of respondents anticipate a real-world reduction in their firm’s trading, with only 25% seeing no impact. This isn’t surprising, he explained, as the proposed FTTs will increase costs of trading. “The rational economic response to the increase in costs will be a reduction in the amount of trading. According to a majority of respondents, the clear view is that FTTs haven’t succeeded in the past, as the negative effects are broad-based and the marginal potential benefits are far outweighed by the true costs.”

Additional findings from the 16-page report include:

  • 72% of the respondents expect an FTT will harm retail trading and retail traders, with nearly 25% saying an FTT will eliminate the benefit of zero commissions for retail traders
  • 65% believe it will negatively impact their personal 401(k) or other retirement portfolios
  • 84% think it will accelerate the move to passive investment by negatively impacting active managers
  • 66% say there will be less liquidity available at the best bid and offer, with 64% expecting spreads to widen as a result of decreased liquidity
  • 64% believe costs of capital will go up for issuers with 57% saying borrowing costs will go up for the public and private sectors.

Once imposed, says Greenwich, the costs of an FTT would overwhelmingly fall on retail investors and could even have negative impacts outside of the financial services industry, leading to increases in the costs of home mortgages and consumer goods, for example. In fact, one respondent described the FTT as a “tax that ends up being borne by the very people it’s purported to help.”

Underscoring the potentially negative impact an FTT could have on the U.S. equity market, Swanson says, “Although the U.S. markets are the envy of the world, an FTT could damage that machinery, resulting in spreads widening, liquidity dropping, stock prices falling, and the possibility of volatility increasing.”