The impact of the French financial transaction tax on HET activities and market quality

Authored by Iryna Veryzhenko, Etienne Harb, Nathalie Oriol, Wael Louhichi

Date Published: 2017

DOI: 10.1016/j.econmod.2017.01.021

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

Based on the first results, the French government estimates that the tax on cancelled orders, considered as tax on High Frequency Trading (HFT), generated no revenue in 2012. Our paper question the effectiveness of a modified cancelled order tax with no exemptions, all orders cancelled or modified within half-second time span are taxed. Our study has important implications for the regulation of HFT; we provide recommendations for regulators in relation to market rules which have yet to be introduced, using an artificial market framework. This paper addresses the question of whether this tax leads to a reduction in HFT activities and, as a result, to deterioration or amelioration of market quality. The evidence we provide should help market regulators to better understand the role played by HFT firms as liquidity suppliers. We show that HFT liquidity is short-lived. With the implementation of tax, decreased HFT activities do not have a statistically significant impact on market volatility and market liquidity measured by bid/ask spreads, but decrease dollar volumes as a liquidity measure. In addition, reduced HFT activities lead to less efficient markets as the deviation from fundamentals increases.

Tags

Agent-based modelling Tobin tax Model Efficiency Traders Liquidity risk Depth Market regulation Expected stock returns Tax on high frequency trading Market liquidity and volatility Regulatory policies Price volatility