This paper studies the effects of the introduction of the French financial transaction tax in August 2012. With the tax, the French government aims to generate revenues for financing the burdens of the financial crisis and to curb short-term trading. We find that the financial transaction tax has a strong impact on trading intensity and liquidity supplier behavior. Trading volume decreases by about one-fifth compared to the pre-event period. While liquidity suppliers reduce the number of quote and price updates and post less volume at best prices, there is no evidence that spreads increase. Our results suggest that policy makers need to be well aware of the links between tax design and investor behavior, before introducing a financial transaction tax.
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The European Parliament voted in favor of a financial transaction tax on May 23, 2012. See European Parliament, “Parliament adopts ambitious approach on financial transaction tax” (Ref. 20120523IPR45627), May 23, 2012 and “Commissioner Šemeta welcomes European Parliament vote on financial transaction tax” (Ref. MEMO/13/652), July 3, 2012.
The introduction of a financial transaction tax is supported by Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain. See, for example, European Commission Press Release, “Taxing financial transactions - making it work”, February 14, 2013.
See The Guardian, “European financial transaction tax moves step closer”, October 23, 2012.
See Metheson (2011) for a review of these studies.
Two examples of interacting forces in modern financial markets are competition between trading venues introduced by the Markets in Financial Instruments Directive (MiFID) in the EU and the rise of algorithmic and high-frequency trading (HFT). See, for example, Riordan et al. (2011) and Hendershott and Riordan (2012], respectively, for a study of these effects.
See Bloomberg, “Hollande transaction tax drives investor quest for loopholes”, July 24, 2012.
The French financial transaction tax is included in Article 5 of the Amended Budget Act 2012-354.
According to the Securities and Exchange Commission (2010], HFT “typically is used to refer to professional traders acting in a proprietary capacity that engage in strategies that generate a large number of trades on a daily basis”. A purchase of a French stock may be subject to the financial transaction tax and the HFT tax. Since our data does not allow to distinguish trades from HFTs and non-HFTs, we are not able to disentangle the effects of both taxes. However, the HFT tax rate is significantly lower (0.01 % of the aquisation value) than the rate of the financial transaction tax (0.2 %), does only apply to firms located in France, and is only triggered when the cancellation rate of orders exceeds a certain threshold. Therefore, we believe that the financial transaction tax is the contributing factor to the patterns that we find in our data.
For example, financial contracts such as Contracts for Difference (CFD) should be out of scope.
Financial service providers offer continuously bid and ask prices, acting on behalf of the stock issuer. Given such kind of liquidity provision agreement, purchases of the financial service provider are exempt from the French financial transaction tax.
See Metheson (2011) for a detailed review of the previous literature.
We thank SIRCA for providing access to its data archive, http://www.sirca.org.au/.
The FTSE 100 index is a share index of blue-chips with the highest market capitalization listed on the LSE.
Initially, we also analyzed trading on the Frankfurt Stock Exchange. Therefore, we also require that stocks are tradeable on this exchange. Two stocks are affected by this filter criteria. However, French stocks are not traded actively in Frankfurt. Therefore, we do not discuss the results.
A list of all stocks in our treatment group and control sample is available from the authors upon request.
On September 6, 2012, the European Central Bank (ECB) announced an unlimited support for all euro area countries and calmed financial markets.
The standard deviation of quoted spreads on Chi-X is much higher compared to Euronext Paris and the LSE. We find no evidence that this pattern is driven by a small number of stocks only.
We observe slightly higher values for quoted spreads at trade compared to effective spreads. This result can be explained through inside-the-spread executions, i.e. marketable orders are executed against completely hidden orders in the order book, and data reporting errors. Over the sample period, on average 8.6 % of all trades on Euronext Paris, 2.9 % on Chi-X, and 8.3 % on the LSE are executed inside the individual order book’s bid-ask spread.
The subsequently discussed results are robust to a shorter observation period. Further information is available from the authors upon request.
The detailed regression results are available from the authors upon request.
Only the daily net balance of all sales and purchases of one investor is taxed. See Section 2.
Note that the reported patterns are not driven by our matching procedure, since similar effects have been presented by related academic and professional studies on the French financial transaction tax (e.g. Colliard and Hoffmann (2013), The Economist, “Skimming the froth”, December 15, 2012).
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Financial support from Boerse Stuttgart is gratefully acknowledged. The views expressed here are those of the authors and do not necessarily represent the views of the Boerse Stuttgart.We thank an anonymous referee for valuable feedback.
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Meyer, S., Wagener, M. & Weinhardt, C. Politically Motivated Taxes in Financial Markets: The Case of the French Financial Transaction Tax. J Financ Serv Res 47, 177–202 (2015). https://doi.org/10.1007/s10693-013-0189-8
- Financial Transaction tax
- Trading intensity
- Market liquidity