Photographer: Andrey Rudakov/Bloomberg

Transaction Tax Poses Bigger Threat Than `Brexit' to Traders

  • High-speed firm would leave Netherlands if tax is introduced
  • Brexit may benefit electronic traders by increasing volatility

There is a bigger threat to financial markets than Brexit.

Ten European countries are developing a tax on financial transactions, a prospect so terrifying to the continent’s traders that one firm in the Netherlands has already drawn up contingency plans to move to the U.K. or Switzerland.

Flow Traders NV, one of Europe’s largest electronic market makers, argues that it would have to move its headquarters if the Dutch authorities levy the tax. A British decision to exit the European Union, however, could actually benefit Flow Traders because it would increase volatility. High-speed traders often see their profits climb as market gyrations lead to greater trading volume.

“We have a plan B ready, if the Dutch government would ever adopt these kinds of plans,” said Dennis Dijkstra, the co-chief executive officer of Flow Traders. “If, God forbid, the Dutch government said it would want to impose a financial-transaction tax that is source-based, we will have to move to the U.K. or Switzerland. We’re prepared.”

Germany and France are leading efforts to introduce a tax on trading inside the European Union. The 10 EU member states drafting the proposals have given themselves until June to agree on how a transaction tax would work.

“It’s the biggest uncertain risk we face,” Dijkstra said.

Election Time

Although the Netherlands isn’t one of the 10 countries seeking to introduce the tax, the country’s traders could still end up paying it depending on the outcome of parliamentary elections next year. The current Dutch government has no intention of enforcing the levy, according to Bouke Bergsma, a spokesman for the Dutch Finance Ministry.

The Netherlands is one of the most developed countries in Europe for private pension funds. Bergsma said that the financial-transaction tax would end up being a charge on pensions. As the proposed tax would be distributed equally to the governments that decide to charge it, ordinary Dutch people could find their retirement savings being used to subsidize public spending in countries where fewer people have pensions.

Hammering Traders

The planned tax would also hammer the group of high-speed traders -- Flow Traders, IMC BV and Optiver -- that operate out of Amsterdam. The city, long a center for options trading, has metamorphosed over the last decade into a European hub for algorithmic trading.

While Flow Traders regards the tax on transactions as a risk, it is relatively comfortable about a possible British vote to leave the EU on June 23.

“From a trading perspective, it’ll lead to higher volumes and short-term volatility, which could be a positive for us,” said the firm’s other co-CEO Sjoerd Rietberg.

Since the turn of the millennium, computerized trading has risen in prominence in major markets around the world, including stocks, options and futures in the U.S. and Europe.

While modern markets rely on high-speed trading, the firms making rapid-fire orders have been accused of increasing market instability.

Flow Traders was founded in 2004 by Jan van Kuijk and Roger Hodenius, both traders from rival Optiver. It employs more than 260 people and also has offices in New York, Singapore and Cluj, Romania. The company handled 645 billion euros ($734 billion) of exchange-traded products in 2015, generating 304.7 million euros of net trading income and 97.3 million euros of profit.

Before it's here, it's on the Bloomberg Terminal.