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The Effect of a Low-Rate Transaction Tax on a Highly Liquid Market

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  • Thornton Matheson

Abstract

This paper studies the effect of the U.S. Securities and Exchange Commission´s R31 fees, a low-rate transaction tax, on large-capitalization U.S. stock trading. The SEC altered the fee rate 15 times between 2001 and 2010, creating a series of natural experiments with which to measure the effect of transaction costs on trading volume and volatility. The main finding is a negative relationship between the SEC fee and the price volatility of stocks in the S&P 500 index. As in most previous studies, a negative relationship is also found between the fee rate and trading volume. The SEC levy´s dampening effect on both trading volume and volatility is particularly strong for more heavily traded stocks within the S&P 500, and in the years after 2007, which witnessed the rise of high-frequency trading.

Suggested Citation

  • Thornton Matheson, 2014. "The Effect of a Low-Rate Transaction Tax on a Highly Liquid Market," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(4), pages 487-510, December.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201412)70:4_487:teoalt_2.0.tx_2-q
    DOI: 10.1628/001522108X685456
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    More about this item

    Keywords

    securities transaction tax;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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