Tobin tax to 'dry up' secondary market, academic warns

GLOBAL – Europe's proposed financial transaction tax (FTT) could dry up the supply of liquid assets in the secondary market and impede pensions funds' ability to manage their portfolios efficiently, one academic has claimed.

Richard Comotto, an academic at the International Capital Market Association (ICMA) Centre at Reading University, told IPE that if the controversial tax were to be introduced for secondary trading, governments would find it difficult to price and issue corporate bonds and almost impossible to issue large quantities of securities.

"This, in turn, means the supply of liquid assets to investors will dry up," he said. "Buying will become far riskier, and investors will be expected to go direct to the issuer."

Comotto went on to say that the "real question" was how issuers would feel comfortable with participating directly in auctions, without the intermediary of primary dealers or market makers, where there is no guidance on price because there is no secondary market suggesting where existing bonds are trading.

"How will investors value their portfolio once they have bought them?" he asked.

"And if they wish to get out of a particular investment – for example, because a bond is downgraded – how will they sell it?

"There will be nobody there to buy it and sell it onto another investor because the taxation will have removed the intermediaries."

Comotto stressed that the secondary market with market makers and primary dealers played a vital part in distributing and valuing securities.

He argued that it was "really rare" for investors – even buy-and-hold investors – to hold a security all the way through to maturity.

"We are reducing the ability of investors to efficiently manage their portfolios," he said.

JP Morgan similarly warned last year against the potential drying up of the secondary market due to new EU regulations.

Speaking at the ICMA conference in Milan, managing director Michael Ridley said EU proposals to limit delays in trade reporting set in the second Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) would reduce supply in the secondary bond and equity markets.

He then called on institutional investors to lobby "aggressively" against those proposals.