Abstract:
This paper presents evidence on the causal impact of financial transaction taxes in a fully electronic market. Our difference-in-differences approach examines the trading activity in French stocks around the introduction of an FTT together with a local HFT tax on August 1st, 2012, relative to a control group of comparable Dutch stocks traded under identical rules. We show that the policy change has led to a large (around 30%) temporary decrease in trading volume during August, which surprisingly was not associated with a significant deterioration of market quality, with the exception of market depth. Most of the impact on volume is reversed in September. In contrast to this largely transitory effect, we uncover a more permanent impact on low-latency activity, as indicated by less aggressive orders and fewer rapid cancellations. Our results suggest that not all types of market activity seem to contribute equally to market quality.

Colliard, Jean-Edouard and Hoffmann, Peter, Sand in the Chips: Evidence on Taxing Transactions in an Electronic Market (February 12, 2013). Available at SSRN: http://ssrn.com/abstract=2215788 or http://dx.doi.org/10.2139/ssrn.2215788

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