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Curbing the Growth of Stock Trading? Order-to-Trade Ratios and Financial Transaction Taxes

Listed author(s):
  • Gunther Capelle-Blancard

The growth of financial markets provokes regular debate, particularly in Europe, and in the aftermath of the global crisis a number of reforms have been proposed. In particular, two regulatory measures have been put forward: order-to-trade ratios and transaction taxes. This paper aims to quantify the impact of such initiatives. To do so, I consider market liquidity and volatility in the Italian Stock Exchange (Borsa Italiana) over the 2011-2013 period, which provides a unique opportunity for empirical assessment: first, a penalty for high order-to-trade ratios (OTR) was implemented in April 2012; second, a transaction tax on securities (STT) was introduced in March 2013 on Italian large and midcaps; third, this tax was extended to derivatives in September 2013 (FTT). No other country has gone so far in terms of financial market regulation. I identify causality via a difference-indifference approach (with German firms and Italian small caps, when appropriate, as control groups) and a regression discontinuity design. I find that neither the OTR nor the STT/FTT had a meaningful impact on market liquidity or volatility. There was however a substantial drop in OTC trading.

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File URL: ftp://ftp.unibocconi.it/pub/RePEc/baf/papers/cbafwp1506.pdf
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Paper provided by BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy in its series BAFFI CAREFIN Working Papers with number 1506.

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Length: 41 pages
Date of creation: 2014
Handle: RePEc:baf:cbafwp:cbafwp1506
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  1. Becchetti, L. & Ferrari, M. & Trenta, U., 2014. "The impact of the French Tobin tax," Journal of Financial Stability, Elsevier, vol. 15(C), pages 127-148.
  2. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
  3. Alexandros Gabrielsen & Massimiliano Marzo & Paolo Zagaglia, 2011. "Measuring market liquidity: An introductory survey," Papers 1112.6169, arXiv.org.
  4. Capelle-Blancard, Gunther & Havrylchyk, Olena, 2016. "The impact of the French securities transaction tax on market liquidity and volatility," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 166-178.
  5. Friederich, Sylvain & Payne, Richard, 2015. "Order-to-trade ratios and market liquidity," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 214-223.
  6. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
  7. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
  8. Michael W. Brandt & Francis X. Diebold, 2006. "A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations," The Journal of Business, University of Chicago Press, vol. 79(1), pages 61-74, January.
  9. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
  10. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  11. Tonny Lybek & Abdourahmane Sarr, 2002. "Measuring Liquidity in Financial Markets," IMF Working Papers 02/232, International Monetary Fund.
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