Transact taxes in a price maker/taker market

Dale Rosenthal and Nordia Diana Marie Thomas

MPRA Paper from University Library of Munich, Germany

Abstract: We 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.

Keywords: transaction tax; Tobin tax; market microstructure; limit order model; high-frequency trading; search costs (search for similar items in EconPapers)
JEL-codes: C72 D44 G18 (search for similar items in EconPapers)
Date: 2012-07-31
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/40597/1/MPRA_paper_40597.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/46847/1/MPRA_paper_46847.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40556

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