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Does a ‘financial transaction tax’ drive out information mirages? An experimental analysis

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Abstract

Motivated by the debate over the economic implications of financial transaction taxes, the present study involved a thorough investigation of the impact of such taxes on a financial market of the type described by Camerer and Weigelt (J Bus 64:463–493, 1991), whereby noise traders are unaware of whether privileged information is fluctuating in the market. Two treatment conditions were opposed to a baseline condition in which no tax was levied. The two treatment conditions imposed a transaction tax equal to 0.5% and 1% of each transaction’s market value, respectively. The findings show that: (1) the introduction of a tax did not affect the occurrence of a mirage, (2) the introduction of a tax did not improve market efficiency and (3) the introduction of a tax did not reduce the number of transactions.

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Notes

  1. For a comprehensive review of the most recent developments on this topic, see Hemmelgarn et al. (2016).

  2. The number of markets varies in each session due to the random selection process.

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Author information

Authors and Affiliations

  1. Dipartimento di Economia, Management e Diritto d’impresa, Università degli Studi di Bari Aldo Moro, Bari, Italy

    Andrea Morone & Simone Nuzzo

  2. Unitelma Sapienza, University of Rome, Rome, Italy

    Pasquale Marcello Falcone & Piergiuseppe Morone

Authors
  1. Andrea Morone
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  2. Pasquale Marcello Falcone
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  3. Simone Nuzzo
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  4. Piergiuseppe Morone
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Correspondence to Andrea Morone.

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Appendix: Experimental instructions

Appendix: Experimental instructions

1.1 Treatment 1: no tax

1.1.1 Welcome to the experiment

This is an experiment on decision making in financial markets. The experiment is straightforward, and the instructions are easy to understand. If you follow them carefully and make good decisions, you could earn a considerable amount of money, which will be paid to you in cash at the end of the experiment.

1.1.2 Experiment overview

In this experiment, you will participate in a simple market. The market will take place over a sequence of 13 trading periods. You may think of each trading period as a ‘business or trading day’. In this market, a generic asset (‘financial good’) is traded and, at any moment during each trading period, you will be free to buy or sell the asset. The money used in this experiment consists of ‘experimental currency units’ (ECU). Your cash payment at the end of the experiment will be in euros. The conversion rate will be 200 ECU to 1 euro. In this experiment, you will make money either from asset trading or from the dividend on the asset.

1.1.3 General instructions

The market consists of nine participants and 13 trading periods. Each trading period will last 3 min (180 s), during which you can trade the asset in exchange for experimental money. The first period is a trial period (we will call it ‘period 0’), in which you will gain familiarity with the trading mechanism. In the trial period, no money will be paid for your earnings. The remaining 12 trading periods will be ‘real’ periods that will count towards your earnings. At the beginning of each trading period, you will be endowed with 200 ECU and 8 units of the asset. At the end of each trading period, the asset will pay a dividend of either 10 or 20. At the beginning of each period, the dividend value will be randomly chosen by the experimenter and not revealed to the market participants. There is a 50% chance that the dividend will be 10 and a 50% chance that the dividend will be 20. At the start of each trading period, there is a 50% chance that no market participants will have any information about the value of the dividend in that trading period and a 50% chance that only 5 out of the 9 participants will be informed about the true dividend that the asset will pay at the end of that trading period.

1.1.4 Buying and selling the asset

At the beginning of each trading period, the screen will show you your initial amount of money, the number of asset units in your portfolio and a signal about your information on the dividend.

You will receive one of the following two signals:

  1. 1.

    ‘You have no information on the value of the dividend’.

  2. 2.

    ‘The value of the dividend is “x”’ (with x = 10 or 20).

If you receive the signal ‘You have no information’, it means that you do not have any information about the dividend the asset will pay at the end of that trading period. If this is the case, you may be in a trading period in which nobody is informed about the dividend; alternatively, you may be in a trading period in which only five market participants have information on the dividend, and you are not amongst them. If you receive the signal ‘The value of the dividend is 10(20)’, it means that the true dividend is 10 or 20, respectively. In this case, you are in a trading period in which only five market participants have information on the dividend, and you are amongst them. The identity of the informed participants will be randomly chosen by the computer in each trading period.

1.1.5 How to use the computerised market

As reported in Figure 1, on the top left of the screen you will see the trading period in which you are currently trading. On the top right of the screen you will see how much time is remaining in the current trading period. In the centre of the screen you will see your amount of money, the number of assets you own and your signal.

figure a

You can participate in the market in the following four ways:

  1. 1.

    Making an offer to sell the asset, by entering the price at which you are willing to sell.

To offer to sell a unit of the asset, enter the price at which you would like to sell in the box labelled ‘Your offer to sell’ in the column on the far left of the screen, then click on the button ‘Offer to sell’ at the bottom of the same column.

The second column from the right will show a list of offers to sell, each submitted by a different participant. The lowest offer to sell will always be placed at the bottom of the list. Your own offer will appear in blue.

  1. 2.

    Making an offer to buy the asset, by entering the price at which you are willing to buy.

To offer to buy a unit of the asset, enter the price at which you would like to buy in the box labelled ‘Your offer to buy’ in the column on the far right of the screen, then click on the button ‘Offer to buy’ at the bottom of the same column. The second column from the left will show a list of offers to buy, each submitted by a different participant. The highest offer to buy will always be placed at the bottom of the list. Your own offer will appear in blue.

  1. 3.

    Selling an asset by accepting an offer to buy.

You can select an offer to buy from the second column from the left by clicking on it. If you click the ‘Sell’ button at the bottom of this column, you will sell one unit of the asset at the selected price. You are not allowed to sell a unit of the asset to yourself. When you accept an offer to buy, it will disappear from the list. If you previously submitted an offer to sell, it will disappear from the offers to sell because you have just sold a unit of your asset.

  1. 4.

    Buying an asset by accepting an offer to sell.

You can select an offer to sell from the second column from the right by clicking on it. If you click the ‘Buy’ button at the bottom of this column, you will purchase one unit of the asset at the selected price. You are not allowed to buy a unit of the asset from yourself. When you accept an offer to sell, it will disappear from the list. If you also previously submitted an offer to buy, it will disappear from the offers to buy because you have just bought a unit of your asset.

You can only buy/sell one unit of the asset at a time. You can buy/sell several times in each trading period. When you buy an asset, your total amount of money will decrease in line with the price of the purchase. You can only buy an asset if you have enough money to pay for it. When you sell an asset, your total amount of money will increase in line with the price of the sale. You can sell units of the asset as long as you own them in your portfolio. In the middle column, labelled ‘Transaction Prices’, you will see the prices at which the units of the asset have been traded in the current trading period. Any time you accept an offer to sell or buy, a new contract will be closed and the selected price will appear in this column.

1.1.6 Your earnings

As reported below, at the end of each trading period your profit will be equal to your ‘Money before payment of dividends’ minus ‘Initial money (200 ECU)’ plus ‘Your total dividend’. At the end of the experiment, your final earnings will be equal to the sum of your profits in each of the 12 ‘real’ trading periods (i.e. not counting the trial period).

The following scheme shows the composition of your earnings for each period:

figure b

1.2 Treatment 2: tax 0.5%

1.2.1 Welcome to the experiment

This is an experiment on decision making in financial markets. The experiment is straightforward and the instructions are easy to understand. If you follow them carefully and make good decisions, you could earn a considerable amount of money, which will be paid to you in cash at the end of the experiment.

1.2.2 Experiment overview

In this experiment, you will participate in a simple market. The market will take place over a sequence of 13 trading periods. You may think of each trading period as a ‘business or trading day’. In this market, a generic asset (‘financial good’) is traded and, at any moment during each trading period, you will be free to buy or sell the asset. The money used in this experiment consists of ‘experimental currency units’ (ECU). Your cash payment at the end of the experiment will be in euros. The conversion rate will be 200 ECU to 1 euro. In this experiment, you will make money either from asset trading or from the dividend on the asset.

1.2.3 General instructions

The market consists of nine participants and 13 trading periods. Each trading period will last 3 min (180 s), during which you can trade the asset in exchange for experimental money. The first period is a trial period (we will call it ‘period 0’), in which you will gain familiarity with the trading mechanism. In the trial period, no money will be paid for your earnings. The remaining 12 trading periods will be ‘real’ periods that will count towards your earnings. At the beginning of each trading period, you will be endowed with 200 ECU and 8 units of the asset. At the end of each trading period, the asset will pay a dividend of either 10 or 20. At the beginning of each period, the dividend value will be randomly chosen by the experimenter and not revealed to the market participants. There is a 50% chance that the dividend will be 10 and a 50% chance that the dividend will be 20. At the start of each trading period, there is a 50% chance that no market participants will have any information about the value of the dividend in that trading period and a 50% chance that only five out of the nine participants will be informed about the true dividend that the asset will pay at the end of that trading period.

1.2.4 Buying and selling the asset

At the beginning of each trading period, the screen will show you your initial amount of money, the number of asset units in your portfolio and a signal about your information on the dividend.

You will receive one of the following two signals:

  1. 1

    ‘You have no information on the value of the dividend’.

  2. 2

    ‘The value of the dividend is “x”’ (with x = 10 or 20).

If you receive the signal ‘You have no information’, it means that you do not have any information about the dividend the asset will pay at the end of that trading period. If this is the case, you may be in a trading period in which nobody is informed about the dividend; alternatively, you may be in a trading period in which only five market participants have information on the dividend, and you are not amongst them. If you receive the signal ‘The value of the dividend is 10(20)’, it means that the true dividend is 10 or 20, respectively. In this case, you are in a trading period in which only five market participants have information on the dividend, and you are amongst them. The identity of the informed participants will be randomly chosen by the computer in each trading period.

1.2.5 How to use the computerised market

As reported in Figure 1, on the top left of the screen you will see the trading period in which you are currently trading. On the top right of the screen, you will see how much time is remaining in the current trading period. In the centre of the screen, you will see your amount of money, the number of assets you own, your signal and the amount of the tax (in percentage terms).

figure c

You can participate in the market in the following four ways:

  1. 1.

    Making an offer to sell the asset, by entering the price at which you are willing to sell.

To offer to sell a unit of the asset, enter the price at which you would like to sell in the box labelled ‘Your offer to sell’ in the column on the far left of the screen, then click on the button ‘Offer to sell’ at the bottom of the same column.

The second column from the right will show a list of offers to sell, each submitted by a different participant. The lowest offer to sell will always be placed at the bottom of the list. Your own offer will appear in blue.

  1. 2.

    Making an offer to buy the asset, by entering the price at which you are willing to buy.

To offer to buy a unit of the asset, enter the price at which you would like to buy in the box labelled ‘Your offer to buy’ in the column on the far right of the screen, then click on the button ‘Offer to buy’ at the bottom of the same column. The second column from the left will show a list of offers to buy, each submitted by a different participant. The highest offer to buy will always be placed at the bottom of the list. Your own offer will appear in blue.

  1. 3.

    Selling an asset by accepting an offer to buy.

You can select an offer to buy from the second column from the left by clicking on it. If you click the ‘Sell’ button at the bottom of this column, you will sell one unit of the asset at the selected price. You are not allowed to sell a unit of the asset to yourself. When you accept an offer to buy, it will disappear from the list. If you previously submitted an offer to sell, it will disappear from the offers to sell because you have just sold a unit of your asset.

  1. 4.

    Buying an asset by accepting an offer to sell.

You can select an offer to sell from the second column from the right by clicking on it. If you click the ‘Buy’ button at the bottom of this column, you will purchase one unit of the asset at the selected price. You are not allowed to buy a unit of the asset from yourself. When you accept an offer to sell, it will disappear from the list. If you also previously submitted an offer to buy, it will disappear from the offers to buy because you have just bought a unit of your asset.

You can only buy/sell one unit of the asset at a time. You can buy/sell several times in each trading period. When you buy an asset, your total amount of money will decrease in line with the price of the purchase, plus the tax. You can only buy an asset if you have enough money to pay for it. When you sell an asset, your total amount of money will increase in line with the price of the sale, minus the tax. You can sell units of the asset as long as you own them in your portfolio. In the middle column, labelled ‘Transaction Prices’, you will see the prices at which the units of the asset have been traded in the current trading period. Any time you accept an offer to sell or buy, a new contract will be closed and the selected price will appear in this column.

1.2.6 Your earnings

As reported below, at the end of each trading period your profit will be equal to your ‘Money before payment of dividends after the deduction of the tax (0.5% of the value of the assets you bought/sold)’ minus ‘Initial money (200 ECU)’ plus ‘Your total dividend’.

At the end of the experiment, your final earnings will be equal to the sum of your profits in each of the 12 ‘real’ trading periods (i.e. not counting the trial period).

The following scheme shows the composition of your earnings for each period:

figure d

In this treatment, to help the subjects process the effect of the tax on their transactions, we provided them with the following table:

Price

Tax = 0.5%

Buyer price

Seller price

10.1

0.0505

10.1505

10.0495

10.2

0.102

10.302

10.098

10.3

0.103

10.403

10.197

10.4

0.104

10.504

10.296

10.5

0.105

10.605

10.395

11

0.110

11.110

10.890

12

0.120

12.120

11.880

13

0.130

13.130

12.870

14

0.140

14.140

13.860

15

0.150

15.150

14.850

16

0.160

16.160

15.840

17

0.170

17.170

16.830

18

0.180

18.180

17.820

19

0.190

19.190

18.810

19.5

0.195

19.695

19.305

19.6

0.196

19.796

19.404

19.7

0.197

19.897

19.503

19.8

0.198

19.998

19.602

19.9

0.0995

19.9995

19.8005

where

  • ‘Buyer price’ is equal to the transaction price plus the tax paid by the buyer. It represents the price the buyer actually pays.

  • ‘Seller price’ is equal to the transaction price minus the tax paid by the seller. It represents the price the seller actually receives.

1.3 Treatment 3: tax 1%

1.3.1 Welcome to the experiment

This is an experiment on decision making in financial markets. The experiment is straightforward, and the instructions are easy to understand. If you follow them carefully and make good decisions, you could earn a considerable amount of money, which will be paid to you in cash at the end of the experiment.

1.3.2 Experiment overview

In this experiment, you will participate in a simple market. The market will take place over a sequence of 13 trading periods. You may think of each trading period as a ‘business or trading day’. In this market, a generic asset (‘financial good’) is traded and, at any moment during each trading period, you will be free to buy or sell the asset. The money used in this experiment consists of ‘experimental currency units’ (ECU). Your cash payment at the end of the experiment will be in euros. The conversion rate will be 200 ECU to 1 euro. In this experiment, you will make money either from asset trading or from the dividend on the asset.

1.3.3 General instructions

The market consists of nine participants and 13 trading periods. Each trading period will last 3 min (180 s), during which you can trade the asset in exchange for experimental money. The first period is a trial period (we will call it ‘period 0’), in which you will gain familiarity with the trading mechanism. In the trial period, no money will be paid for your earnings. The remaining 12 trading periods will be ‘real’ periods that will count towards your earnings. At the beginning of each trading period, you will be endowed with 200 ECU and 8 units of the asset. At the end of each trading period, the asset will pay a dividend of either 10 or 20. At the beginning of each period, the dividend value will be randomly chosen by the experimenter and not revealed to the market participants. There is a 50% chance that the dividend will be 10 and a 50% chance that the dividend will be 20. At the start of each trading period, there is a 50% chance that no market participants will have any information about the value of the dividend in that trading period and a 50% chance that only five out of the nine participants will be informed about the true dividend that the asset will pay at the end of that trading period.

1.3.4 Buying and selling the asset

At the beginning of each trading period, the screen will show you your initial amount of money, the number of asset units in your portfolio and a signal about your information on the dividend.

You will receive one of the following two signals:

  1. 1.

    ‘You have no information on the value of the dividend’.

  2. 2.

    ‘The value of the dividend is “x”’ (with x = 10 or 20).

If you receive the signal ‘You have no information’, it means that you do not have any information about the dividend the asset will pay at the end of that trading period. If this is the case, you may be in a trading period in which nobody is informed about the dividend; alternatively, you may be in a trading period in which only five market participants have information on the dividend, and you are not amongst them. If you receive the signal ‘The value of the dividend is 10(20)’, it means that the true dividend is 10 or 20, respectively. In this case, you are in a trading period in which only five market participants have information on the dividend, and you are amongst them. The identity of the informed participants will be randomly chosen by the computer in each trading period.

1.3.5 How to use the computerised market

As reported in Figure 1, on the top left of the screen you will see the trading period in which you are currently trading. On the top right of the screen, you will see how much time is remaining in the current trading period. In the centre of the screen, you will see your amount of money, the number of assets you own, your signal and the amount of the tax (in percentage terms).

figure e

You can participate in the market in the following four ways:

  1. 1.

    Making an offer to sell the asset, by entering the price at which you are willing to sell.

To offer to sell a unit of the asset, enter the price at which you would like to sell in the box labelled ‘Your offer to sell’ in the column on the far left of the screen, then click on the button ‘Offer to sell’ at the bottom of the same column.

The second column from the right will show a list of offers to sell, each submitted by a different participant. The lowest offer to sell will always be placed at the bottom of the list. Your own offer will appear in blue.

  1. 2.

    Making an offer to buy the asset, by entering the price at which you are willing to buy.

To offer to buy a unit of the asset, enter the price at which you would like to buy in the box labelled ‘Your offer to buy’ in the column on the far right of the screen, then click on the button ‘Offer to buy’ at the bottom of the same column. The second column from the left will show a list of offers to buy, each submitted by a different participant. The highest offer to buy will always be placed at the bottom of the list. Your own offer will appear in blue.

  1. 3.

    Selling an asset by accepting an offer to buy.

You can select an offer to buy from the second column from the left by clicking on it. If you click the ‘Sell’ button at the bottom of this column, you will sell one unit of the asset at the selected price. You are not allowed to sell a unit of the asset to yourself. When you accept an offer to buy, it will disappear from the list. If you previously submitted an offer to sell, it will disappear from the offers to sell because you have just sold a unit of your asset.

  1. 4.

    Buying an asset by accepting an offer to sell.

You can select an offer to sell from the second column from the right by clicking on it. If you click the ‘Buy’ button at the bottom of this column, you will purchase one unit of the asset at the selected price. You are not allowed to buy a unit of the asset from yourself. When you accept an offer to sell, it will disappear from the list. If you also previously submitted an offer to buy, it will disappear from the offers to buy because you have just bought a unit of your asset.

You can only buy/sell one unit of the asset at a time. You can buy/sell several times in each trading period. When you buy an asset, your total amount of money will decrease in line with the price of the purchase, plus the tax. You can only buy an asset if you have enough money to pay for it. When you sell an asset, your total amount of money will increase in line with the price of the sale, minus the tax. You can sell units of the asset as long as you own them in your portfolio. In the middle column, labelled ‘Transaction Prices’, you will see the prices at which the units of the asset have been traded in the current trading period. Any time you accept an offer to sell or buy, a new contract will be closed and the selected price will appear in this column.

1.3.6 Your earnings

As reported below, at the end of each trading period your profit will be equal to your ‘Money before payment of dividends after the deduction of the tax (1% of the value of the assets you bought/sold)’ minus ‘Initial money (200 ECU)’ plus ‘Your total dividend’.

At the end of the experiment, your final earnings will be equal to the sum of your profits in each of the 12 ‘real’ trading periods (i.e. not counting the trial period).

The following scheme shows the composition of your earnings for each period:

figure f

In this treatment, to help the subjects process the effect of the tax on their transactions, we provided them with the following table:

Price

Tax = 1%

Buyer price

Seller price

10.2

0.102

10.302

10.098

10.3

0.103

10.403

10.197

10.4

0.104

10.504

10.296

10.5

0.105

10.605

10.395

11

0.110

11.110

10.890

12

0.120

12.120

11.880

13

0.130

13.130

12.870

14

0.140

14.140

13.860

15

0.150

15.150

14.850

16

0.160

16.160

15.840

17

0.170

17.170

16.830

18

0.180

18.180

17.820

19

0.190

19.190

18.810

19.5

0.195

19.695

19.305

19.6

0.196

19.796

19.404

19.7

0.197

19.897

19.503

19.8

0.198

19.998

19.602

where

  • ‘Buyer price’ is equal to the transaction price plus the tax paid by the buyer. It represents the price the buyer actually pays.

  • ‘Seller price’ is equal to the transaction price minus the tax paid by the seller. It represents the price the seller actually receives.

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Morone, A., Falcone, P.M., Nuzzo, S. et al. Does a ‘financial transaction tax’ drive out information mirages? An experimental analysis. J Econ Interact Coord 15, 793–820 (2020). https://doi.org/10.1007/s11403-019-00271-4

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  • DOI: https://doi.org/10.1007/s11403-019-00271-4

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