Securities Transaction Tax and Market Quality – the Case of France

Abstract

The French Securities Transaction Tax (STT) implementation on August 1 st , 2012, is considered a landmark development within securities markets regulation. However, until today the controversy about possible drawbacks and applicability has not reached a conclusion and consequences for market quality are yet to be thoroughly assessed. In this light a rigorous evaluation on the STT's effect on market quality is highly desirable and would provide guidance for academics, regulators and practitioners alike. On this basis, we provide evidence that trading activity declines by approximately 16% after the introduction of the STT. Even though the French proposal exempts liquidity providing activities, we find increased spread levels and a strong decline in top order book depth resulting in additional transaction costs for market participants beside the tax. Most alerting, as the STT affects trading on all French listing venues, we find this deterioration in market quality threatening inter-market information transmission by impairing price coordination among the European fragmented markets.

Financial Transaction Taxes, Market Composition, and Liquidity

“…8 Simultaneously, the government introduced a tax of 1 bp on the notional amount of modified or cancelled messages by HFTs exceeding an order-totrade ratio of 5:1. Unlike the FTT, this tax applies to trading in all French 5 See Meyer, Wagener, and Weinhardt (2015), Becchetti, Ferrari, and Trenta (2014), Capelle-Blancard and Havrylchyk (2017), Coelho (2014), and Gomber, Haferkorn, and Zimmermann (2016). 6 For the first year of implementation the tax applied to shares with a market capitalization above one billion euros on January 1st 2012.…”

“…5 In addition, Meyer, Wagener, and Weinhardt (2015) show that the FTT's impact is roughly comparable across different trading venues. Gomber, Haferkorn, and Zimmermann (2016) focus on price discovery and document a decrease in market integration following the policy experiment. Coelho (2014) provides additional evidence from the introduction of the Italian FTT in 2013.…”

“…See Meyer, Wagener, and Weinhardt (), Becchetti, Ferrari, and Trenta (), Capelle‐Blancard and Havrylchyk (), Coelho (), and Gomber, Haferkorn, and Zimmermann ().…”

Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

“…Nevertheless, the effectiveness of a financial transaction tax is still a controversial and highly debated topic among academics (see, for instance, McCulloch and Pacillo, 2011, for a review of existing works on financial transaction taxes). On the one hand, empirical evidence on the relationship between FTT and market quality delivers mixed results (see, for instance, Roll, 1989;Umlauf, 1993;Jones and Seguin, 1997;Habermeier and Kirilenko, 2001;Hau, 2006;Gomber, Haferkorn, and Zimmermann, 2015), although some studies (e.g. Colliard and Hoffmann, 2013) find that an FTT may have a permanent positive effect on low-latency trading, due to lower order aggressiveness and fewer rapid cancellations.…”

High-frequency Trading: Review of the Literature and Regulatory Initiatives around the World

“…Gomber et al . () analyze the stock market data of firms from the CAC 40 index for the period that encompasses six months before and after August 2012 . Their result indicates that liquidity has declined after the French FTT, as relative spreads of the largest companies’ stocks rose by 12% and quoted depths fell by 17% when using German stocks as a benchmark.…”