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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus Demary, 2011. "Transaction taxes, greed and risk aversion in an agent-based financial market model," Journal of Economic Interaction and Coordination, Springer, Springer, vol. 6(1), pages 1-28, May.
- Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005.
Econometrica, Econometric Society,
Econometric Society, vol. 73(6), pages 1815-1847, November.
- Harris, Larry, 2002. "Trading and Exchanges: Market Microstructure for Practitioners," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195144703, October.
- Paolo Pellizzari & Frank Westerhoff, 2009.
"Some effects of transaction taxes under different microstructures,"
Working Papers, Department of Applied Mathematics, UniversitÃ Ca' Foscari Venezia
190, Department of Applied Mathematics, Università Ca' Foscari Venezia.
- Pellizzari, Paolo & Westerhoff, Frank, 2009. "Some effects of transaction taxes under different microstructures," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(3), pages 850-863, December.
- Paolo Pelizzari & Frank Westerhoff, 2007. "Some Effects of Transaction Taxes Under Different Microstructures," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 212, Quantitative Finance Research Centre, University of Technology, Sydney.
- Gustavo Manso & Gaston Giroux & Darrell Duffie, 2008.
2008 Meeting Papers
471, Society for Economic Dynamics.
- Darrell Duffie & Gaston Giroux & Gustavo Manso, 2010. "Information Percolation," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 2(1), pages 100-111, February.
- Diamond, Peter A, 1982.
"Aggregate Demand Management in Search Equilibrium,"
Journal of Political Economy, University of Chicago Press,
University of Chicago Press, vol. 90(5), pages 881-94, October.
- P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 268, Massachusetts Institute of Technology (MIT), Department of Economics.
- Andrew W. Lo & Craig A. MacKinlay, .
"An Econometric Analysis of Nonsyschronous-Trading,"
Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research
19-89, Wharton School Rodney L. White Center for Financial Research.
- Binmore, Ken G & Herrero, M J, 1988. "Matching and Bargaining in Dynamic Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(1), pages 17-31, January.
- Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, Elsevier, vol. 2(2), pages 99-134, May.
- Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
- Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, American Economic Association, vol. 87(4), pages 728-37, September.
- Robert Pollin & Dean Baker & Marc Schaberg, 2003.
"Securities Transaction Taxes for U.S. Financial Markets,"
Eastern Economic Journal,
Eastern Economic Association, vol. 29(4), pages 527-558, Fall.
- Marc Schaberg & Dean Baker & Robert Pollin, 2002. "Securities Transaction Taxes for U.S. Financial Markets," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp20, Political Economy Research Institute, University of Massachusetts at Amherst.
- Darrell Duffie & Semyon Malamud & Gustavo Manso, 2011.
"Information Percolation in Segmented Markets,"
NBER Working Papers
17295, National Bureau of Economic Research, Inc.
- Darrell DUFFIE & Semyon MALAMUD & Gustavo MANSO, 2010. "Information Percolation in Segmented Markets," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 10-09, Swiss Finance Institute.
- Cipriani, Marco & Guarino, Antonio, 2008. "Transaction costs and informational cascades in financial markets," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 68(3-4), pages 581-592, December.
- Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(2), pages 227-240, April.
- Thomas Palley, 1999. "Speculation and Tobin taxes: Why sand in the wheels can increase economic efficiency," Journal of Economics, Springer, Springer, vol. 69(2), pages 113-126, June.
- Anand, Amber & Chakravarty, Sugato & Martell, Terrence, 2005. "Empirical evidence on the evolution of liquidity: Choice of market versus limit orders by informed and uninformed traders," Journal of Financial Markets, Elsevier, Elsevier, vol. 8(3), pages 288-308, August.
- Mannaro, Katiuscia & Marchesi, Michele & Setzu, Alessio, 2008. "Using an artificial financial market for assessing the impact of Tobin-like transaction taxes," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 67(2), pages 445-462, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.