Securities Transaction Tax and Market Quality – the Case of France

AuthorMartin Haferkorn,Peter Gomber,Kai Zimmermann
Published date01 March 2016
Date01 March 2016
Securities Transaction Tax and Market
Quality the Case of France
Peter Gomber, Martin Haferkorn and Kai Zimmermann
Goethe University Frankfurt, Frankfurt Faculty of Economics and Business Administration,
uneburgweg 1, 60323 Frankfurt am Main, Germany
E-mail: Gomber/Haferkorn/
We study the French Securities Transaction Tax implementation of 1 August 2012.
Although a similar tax is planned to be introduced across 11 European countries,
consequences for market quality are yet to be thoroughly assessed. We show that
liquidity demand and supply signif‌icantly drop. Even though the French proposal
exempts professional liquidity provision, we f‌ind increased spreads and a declined
order book depth resulting in additional transaction costs for market participants
besides the tax. As all venues trading French stocks are affected, we further f‌ind that
STT threatens inter-market information transmission by impairing price
coordination among fragmented markets in Europe.
Keywords: financial transaction tax, liquidity, market efficiency, volatility
JEL classification: G12, G14, G18, G28
1. Introduction
The concept of the securities transaction tax (STT) is one of the most controversial topics
in f‌inancial markets regulation during the last four decades. Politicians argue that this tax
would dampen speculative trading activity leading to increased f‌inancial market integrity
(e.g. Summers and Summers, 1989; Stiglitz, 1989). Opponents posit that a STT would not
only impair f‌inancial marketsquality but also unnecessarily burden the economy by
biasing investorscapital allocation (e.g. Matheson, 2011; Habermeier and Kirilenko,
2001). Although theoretical research is widespread and supported by some empirical
We are grateful to John Doukas (the editor of this Journal) and the two anonymous referees
for their valuable comments. We thank the participants at the European Finance Association
Meeting (August 2013), the European Financial Management Association Annual
Conference (June 2013), E-Finance Lab Jour Fixe (July 2013) and the Southern Finance
Associating Annual Meeting (November 2013) for helpful comments and suggestions.
Correspondence: Peter Gomber
European Financial Management, Vol. 22, No. 2, 2016, 313337
doi: 10.1111/eufm.12062
© 2015 John Wiley & Sons Ltd
studies, no common understanding on how a STT affects market quality is reached yet.
These scarce empirical results are limited in their applicability in todays market settings
as conditions in recent years have changed drastically. In Europe, the ongoing
fragmentation process induced by the Markets in Financial Instruments Directive
(MiFID) fosters competition among trading venues. New technologies (e.g. high
frequency trading (HFT) as well as smart order routing) and innovative pricing regimes
like maker-taker pricing added even more layers of complexity. In the light of this
controversy, contradictory research results and the plans for a STT in many European
countries, research is crucial in providing guidance for regulators, practitioners and
academics alike.
In 2012, France decided to introduce a STT providing a suitable and recent case to draw
empirical conclusions on this subject. To follow the call of Schwert and Seguin (1993) to
provide more empirical evidence, we obtain insights into market quality changes via a
difference-in-differences analysis. First, by evaluating various dimensions of single-
market quality parameters, e.g. price volatility, trading activity and order book depth, we
will focus on STT induced changes to liquidity demand and supply at NYSE Euronext
Paris. We f‌ind trade executions (traded volumes) declining on average by 15 percent (19
percent) within 2 months (medium-term event window) after the implementation, which
is in line with results of previous studies like Pomeranets and Weaver (2012). Focusing on
order book liquidity provision, we f‌ind an instantaneous decline in order book depth
immediately after the introduction of the STT as well as a widening of the relative spread
levels although professional liquidity provision is not taxed, leading to additional implicit
transaction costs on top of the explicit tax. Although these effects are peaking in the short-
term event window (10 days after implementation), results remain robust even 6 month
after the implementation (long-term event window) and even after omitting the initial
peak. Market volatility levels remain unchanged in the long-, medium- as well as in the
short-term and therefore give no indication whether the lost order volume and trading
activity was of distinct disorienting nature, as argued by Summers and Summers (1989)
and Stiglitz (1989).
Second, in light of the fragmented nature of todays European market landscape, we
add another dimension of market quality analysis. As French stocks are traded on multiple
trading venues, we analyse whether the quality of inter-market price coordination
among French stocks has changed after the STT introduction. Information transmission
between dispersed markets is a major requirement for price coordination, thereby
ensuring price homogeneity and investorsconf‌idence among fragmented markets
(Hasbrouck, 1995). By investigating information transmission between two taxed
markets before and after the STT, we give an insight how this coordination mechanism
is affected by the STT following the methodology of Engle and Granger (1987). We
f‌ind that price coordination between venues deteriorates signif‌icantly, as exogenous
shocks to the long-term price equilibrium are reverted slower than before the introduction
of the tax.
Our paper is structured as follows: In the next section we present a literature review on
transaction taxes in general. We then provide a systematic insight on the French STT
outlining relevant characteristics. In the research design section, we exhibit our dataset
and methodology. The results related to market quality and inter-market information
transmission as well as a review of the results of recent other papers on the impact of the
French STT are presented in sections 5 and 6 respectively. Concluding remarks and
outlook are given in the last section.
© 2015 John Wiley & Sons Ltd
314 Peter Gomber, Martin Haferkorn and Kai Zimmermann

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