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Tuesday, October 26, 2010

A cross-country comparison of charges of exchanges

In reading this article in the Wall Street Journal by By Rebecca Thurlow, Alison Tudor And P. R. Venkat about the potential merger of SGX with ASX, I saw this interesting cross-country comparison of exchange charges (in basis points):

Country Trading and clearing Taxes
Hong Kong1.120

It is quite a striking set of facts.

First, we see that in terms of the core trading and clearing -- the charges of the exchange -- India is the 2nd lowest in this pile, with a value of 0.35 basis points. This is slightly worse than Japan (0.24 basis points) and superior to all the others. This partly derives from the immense economies of scale at NSE and BSE, which are ranked at 3 and 5 in the world by number of transactions. This is also about the cost-efficiency of the human part of running an exchange: small exchanges like SGX cannot match the price points which NSE and BSE can reach. In this field, as in finance more broadly, India is pretty good at reaching up to world class at below the world price. This was the basic logic, if you recall, of Percy Mistry's Mumbai as an International Financial Centre report.

Secondly, we see the huge problem that transactions taxes present in all these countries other than Singapore, Australia and Japan. The Indian charge of 0.35 basis points is just swamped by the taxation of 27 basis points. Even if NSE cut charges by half, and got down to 0.175 basis points, this would do nothing for the end-customer who is paying 27.35 today and ends up paying 27.175 across the price cut. Conversely, Singapore, with the least efficient exchange (4.75 basis points) ends up being a nice place for the customer because there is no tax upon transactions there: only Australia and Japan are better than Singapore.

Economists are very clear that all taxation of transactions is distortionary. It's puzzling why so many countries (four out of these seven) continue to indulge in something which is an elementary mistake in public policy.


  1. I was ferverntly hoping that new DTC would abolish STT. But that did not happen. Service tax and stamp duty are other nuisances. I think the Stamp Duty must go as there is Service Tax on the same transaction. If the Service Tax is given to the states, they may agreee to drop the Stamp Duty.

  2. All taxes are NOT distortionary.

    I will, consider taxes that favor one party against another (e.g. taxes that favor buyer against seller or vice versa) are distortionary.

    In this case, I will consider taxes to be reasonable if they fully cover the cost of automation, regulatory mechanisms and any other externalities related to the operation of the exchanges . I do not expect these taxes to subsidize rest of the economy.

  3. Oh yes, and don't forget the original proposal for the STT which was 10 times the current rate. A similar heavy tax was imposed in Sweden? in 90's and it almost brought down the exchange. In 2004, they failed to this basic background study before proposing the tax. Luckily, finmin listened to reason later.

  4. Sir,

    As a retail trader and dealing with independent traders, this is a great obstacle in the democratisation of financial markets. The truly obscene levels of taxes ( STT, Service tax, Stampduty, Turnover charges( variable by brokers)) truly hurting the volumes in the market particularly intraday.
    The trader is forced to pay more than twice the brokerage for other charges. Fighting the bid-ask spread, slippage and Vig is becoming ruinous for independent,retail traders.

  5. Sir,

    I would like to bring to your notice that STT in India is 0.25 % (25 bps), but it is inclusive of Buy and Sell. Exchange Levies 0.125 % each side, so effective transaction cost is 12.50 Bps.

    But I will agree with you that such taxes distort price discovery process to the tune of STT. such distortion is seen in both Equity segment and Derivative segment (futures and Option)

  6. Note to gov/regulators:

    Please abolish STT. Hike short term cap gains tax if you must, I can deal with that. But, STT is pure evil. Its frustrating that there is no forum/channel on which to protest this.

    And, why not compare with Europe/US? SGP/KOR/HKG aren't anything great to aspire to.


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