Transact taxes in a price maker/taker market
AbstractWe develop a price maker/taker model to study how a financial transaction tax affects markets. We find taxes widen quoted and effective spreads by more than twice the tax. Taxes increase volatility slightly (without intermediation) to significantly (with intermediation). High taxes may halve volumes and gains from trade while doubling search costs. Measures of market quality are more affected by taxes in markets with intermediaries. Investors and intermediaries competing for liquidity can triple search costs and increase quoted spreads while decreasing effective spreads. We also find revenue-optimal rates of 60-75 bp. Our results are particularly relevant to markets with high-frequency trading or thin depth.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 40556.
Date of creation: 31 Jul 2012
Date of revision:
transaction tax; Tobin tax; market microstructure; limit order model; high-frequency trading; search costs;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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