Transaction taxes in a price maker/taker market

Rosenthal, Dale W.R. and Thomas, Nordia Diana Marie and Wang, Hefei (2013): Transaction taxes in a price maker/taker market.

Abstract

We develop a price maker/taker model to study how a financial transaction tax affects markets where potential traders either take a price or quote prices for the next potential trader. We find taxes widen quoted and effective spreads by many times the tax; reduce volume, gains from quoting, and gains from trade; may decrease volatility slightly without market makers; increase volatility significantly with market makers; and, do not eliminate destabilizing speculators. These effects are amplified in markets with market makers. We find revenue-optimal rates of 55-70 basis points but that the socially-optimal tax would be zero.

• Item Type: MPRA Paper
• Language: English
• Keywords: transaction tax, Tobin tax, market microstructure, limit order model, market makers, high-frequency trading, search costs
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

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