The financial transaction tax is a fine way to hurt the economy as a whole and eliminate trading. Volumes will be erased. Never thought it to be likely to come into effect in reality, but I underestimated French stupidity.

Here‘s the official plan. Four pages in French about taxes, not my cup of tea. In short, there’s good news and bad news. The bad news is the trading in large cap French stocks will be hurt severely and the derivative market will cease to exist.

The good news is the measures won’t work. Practical issues are deeply rooted in the plan and hard to overcome. In the extent the plans will work (partly), France will show the rest of the world how to shoot in your own foot. Even socialists in the rest of Europe will be scared enough to get second thoughts.

The masterplan

  • Only French stocks with a market cap in excess of 1 billion euro will be affected.
  • Any buyer of these French stocks will have to pay 0,1 % tax. This also counts for derivatives such as options (notional), hence the option market will be gone.
  • Credit Default Swaps will be taxed 0,01%.
  • High frequency trades will be taxed 0,01%

It doesn’t matter where the trade is done. A Russian buyer of shares Total or Sanofi on Wall Street will be taxed. Vladimir has to pay money to Sarkozy. The administration will be done by keeping track of the Central Securities Depository (CSD). This CSD receives the nett change from other central clearing parties, so buying and selling shares on the same day wouldn’t be taxed with the current proposition.

Suppose, for sake of the argument, the French fix all practical problems and their markets will be gone. Very well possible one of the biggest option classes in Amsterdam would be hit as well. After all, Mittal is part of the CAC40. Maybe a suggestion to liquidate your positions while you still can. To be continued.