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The Impact of the French Financial Transaction Tax on HFT Activities and Market Quality

Author

Listed:
  • Iryna Veryzhenko

    (LIRSA
    CNAM
    Labex Refi)

  • Etienne Harb

    (Essca Research Lab)

  • Waël Louhichi

    (Essca Research Lab)

  • Nathalie Oriol

    (Université Côte d'Azur
    GREDEG CNRS)

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.

Suggested Citation

  • Iryna Veryzhenko & Etienne Harb & Waël Louhichi & Nathalie Oriol, 2017. "The Impact of the French Financial Transaction Tax on HFT Activities and Market Quality," GREDEG Working Papers 2017-05, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2017-05
    Note: To request an electronic copy of this paper, please email the author at Nathalie.ORIOL@gredeg.cnrs.fr.
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    3. Iryna Veryzhenko & Arthur Jonath & Etienne Harb, 2022. "Non-Value-Added Tax to improve market fairness and quality," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-30, December.
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    5. Nathalie Oriol & Iryna Veryzhenko, 2019. "Market structure or traders' behavior? A multi agent model to assess flash crash phenomena and their regulation," Quantitative Finance, Taylor & Francis Journals, vol. 19(7), pages 1075-1092, July.
    6. Yin, Zhichao & Peng, Hongfeng & Xiao, Weiguo & Xiao, Zumian, 2022. "Capital control and monetary policy coordination: Tobin tax revisited," Research in International Business and Finance, Elsevier, vol. 59(C).
    7. Sébastien Duchêne & Nathalie Oriol, 2018. "Too fast, Too furious? Une réflexion historique et contemporaine sur l'emballement des marchés financiers," Post-Print halshs-01860721, HAL.

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