Munich Personal RePEc Archive

Transaction taxes in a price maker/taker market

Rosenthal, Dale W.R. and Thomas, Nordia Diana Marie (2012): Transaction taxes in a price maker/taker market.

WarningThere is a more recent version of this item available.
[img]
Preview
PDF
MPRA_paper_40597.pdf

Download (644kB) | Preview

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.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.