Analysys of the implementation of the Spanish Financial Transaction Tax in equity markets

This paper evaluates the effect of the introduction of the ITF on Spanish shares in secondary markets, focusing on the potential costs. For this purpose, it considers several dimensions of liquidity (measured through the bid-ask spread and the Amihud ratio), volatility (both intraday and historical) and trading volume of the secondary markets in which Spanish shares are traded. The paper uses two models: one based on difference-in-differences and another wich relies on a regression discontinuity design. This approach tries to capture two types of effects: firstly, the impact of the introduction of the tax by comparing the evolution of the variables of Spanish shares subject to the FTT with those of other countries with similar characteristics and not subject to the FTT. Secondly, the evolution of the variables linked to the trading of shares of Spanish companies subject to tax whith those are not. The paper reveals that the effect of the tax on the trading of Spanish shares have been limited in absolute terms and were mostly temporary. Two opposing effects are detected: on the one hand, the trading of taxed Spanish shares decreased after the introduction of the tax. On the other hand, these shares recovered part of the trading volume that was carried out in OTC markets. With respect to volatility, it increased in the short term, and tended to decrease in the long term.