Sand in the Chips? Evidence on Taxing Transactions in Modern Markets Jean-Edouard Colliard Peter Hoffmann HEC Paris ECB Market Microstructure - Confronting Many Viewpoints - December 10, 2014 The views expressed here are the authors’ and do not necessarily reflect those of the ECB or the Eurosystem.
Road map Introduction Methodology and data Average impact The role of high-frequency market-making Institutional trading Conclusion
Context ◮ Renewed interest for financial transactions taxes (FTT) since the onset of the crisis: ◮ Budget deficits ◮ Public discontent with financial sector ◮ 11 countries committed to a European FTT ◮ “Historical” evidence rather negative, but... ◮ No micro evidence ⇒ few/no links to economic mechanisms ◮ Poor data (no counterfactuals, emerging markets, etc.) ◮ Market structure has changed (e.g. HFT)
UK Stamp Duty Revenue/Volume
This paper ◮ Evidence on the French FTT (August 2012) ◮ Stamp duty on ownership transfers ◮ Exemptions for liquidity provision ◮ Tax on domestic non-MM HFT activity ◮ Diff-in-diff with other Euronext stocks ◮ (Lit) market quality ◮ Role of MM exemption ◮ Trader types (HFT, nonHFT, Mixed) ◮ Institutional trading and impact on different clienteles
Results ◮ On average, the FTT had a negative, but muted impact on market quality ◮ Drop in volume ( − 10%), depth, resiliency, price efficiency ◮ No effect on bid-ask spread and volatility
Results ◮ On average, the FTT had a negative, but muted impact on market quality ◮ Drop in volume ( − 10%), depth, resiliency, price efficiency ◮ No effect on bid-ask spread and volatility ◮ Is there any role for the MM exemption?
Results ◮ On average, the FTT had a negative, but muted impact on market quality ◮ Drop in volume ( − 10%), depth, resiliency, price efficiency ◮ No effect on bid-ask spread and volatility ◮ Is there any role for the MM exemption? ◮ Stocks w/ HFT MM: no impact ◮ Stocks w/o HFT MM: ր vola, price impact, spreads
Results ◮ On average, the FTT had a negative, but muted impact on market quality ◮ Drop in volume ( − 10%), depth, resiliency, price efficiency ◮ No effect on bid-ask spread and volatility ◮ Is there any role for the MM exemption? ◮ Stocks w/ HFT MM: no impact ◮ Stocks w/o HFT MM: ր vola, price impact, spreads ◮ More informed market orders, decrease in liquidity provision ◮ Exempted HFT MMs continue providing liquidity ⇒ structure of liquidity provision matters for tax design
Results ◮ To wash out the effect of HFT, we analyze institutional trading (changes in portfolio holdings) ◮ Average impact of − 20% ◮ Larger reduction in holdings of French stocks and trading volume for: ◮ funds with high turnover (Amihud and Mendelson (1986)) ◮ index funds
Literature - Theory ◮ Keynes (1936), Tobin (1978), Stiglitz (1989), Summers and Summers (1989), Schwert and Seguin (1993) ◮ Potential Rationales for taxing (some) trading activity: ◮ Noise traders (DeLong et al. (1990b)) ◮ Speculators (DeLong et al. (1990a), Di Maggio (2013)) ◮ Intermediaries (Menkveld and Yueshen (2013)) ◮ Short-termism (De Long, Shleifer, Summers, and Waldmann (1990b)) ◮ Net effect determined by changes in market composition ◮ Kupiec (1996), Song and Zhang (2005), Bloomfield et al. (2009) ◮ Empirical challenge: need disaggregated evidence
Literature - Empirics ◮ Empirics: Roll (1989), Umlauf (1993), Campbell and Froot (1994), Jones and Seguin (1997), Hau (2006), Baltagi et al. (2006), Pomeranets and Weaver (2012), Liu and Zhu (2009), Deng et al. (2014), etc. ◮ Empirical challenges ◮ no disaggregated data ⇒ harder to link to theory ◮ emerging markets or pre-2000s ◮ no X-section, no control groups ◮ Other papers on French FTT confirm average impact: Meyer et al. (2014), Haferkorn and Zimmermann (2013), Capelle-Blancard and Havrylchyk (2013), Coelho (2014), Becchetti et al. (2013).
Road map Introduction Methodology and data Average impact The role of high-frequency market-making Institutional trading Conclusion
The policy experiment ◮ France introduced an FTT on August 1st, 2012 ◮ Restricted to French stocks with market cap ≥ 1 bln e ◮ Purchases are taxed at 0.2% (ownership transfers) ◮ Several exemptions (market making, primary market) ◮ Additional tax on HFT (traders residing in France) ◮ HFT defined as activity below a threshold of 0.5 seconds
Identification strategy ◮ Standard diff-in-diff ◮ Control group: non-French stocks traded on Euronext ◮ Identification assumption: common trends ◮ Standard checks: placebo DiD, visual inspection ◮ Allow for differences in short-/long-run impacts E ( y i , t | i , t ) = α i + γ t + β Aug D Aug + β Sep / Oct D Sep / Oct i , t i , t ◮ We focus on Sep/Oct (August “polluted” by seasonality)
Identification: FTT and HFT Tax French Dutch FTT+HFT Tax 85 stocks 32 stocks FTT only 1 bln. EUR HFT Tax only 29 stocks 18 stocks
Data ◮ Sample period: Jun 1st - Oct 31st (109 days) ◮ Stocks traded on Euronext with “sufficient liquidity” ◮ Drop: Banks (Crisis), PT (Crisis), BE (change in local FTT) ◮ 117 above 1 bln EUR (85 vs. 32), 47 below 1 bln EUR (29 vs. 18) ◮ Trades, quotes, LOB changes (TRTH) ◮ Trader group IDs (only FR): HFT, nonHFT, Mixed (Source: EUROFIDAI/AMF) ◮ Institutional Portfolios (Factset)
Road map Introduction Methodology and data Average impact The role of high-frequency market-making Institutional trading Conclusion
Intraday price range minus pre-tax average - 2012 1.0 0.5 0.0 � 0.5 Mar 1 May 1 Jul 1 Aug 1 Sep 1
Trading volume (log) minus pre-tax average 0.2 0.0 � 0.2 � 0.4 � 0.6 � 0.8 � 33. � � 9.9 � June 1 July 2 August 1 September 3 October 1
Regression results - June/July vs. Sep/Oct Variable/Group French > 1 bln French < 1 bln Volume -0.104** 0.040 (-2.46) (0.45) Volatility 0.365 1.854 (0.41) (1.14) Effective Spread 0.029 0.243 (0.16) (0.30) Price Impact 0.201 -0.365 (1.28) (-0.77) Depth -10.761*** -4.805 (-2.85) (-1.45) Resiliency -0.018* 0.021** (-1.90) (2.08) AR 0.007** -0.004 (2.09) (-0.74)
Discussion ◮ Overall, the FTT’s impact is rather muted ◮ Spreads and volatility are unchanged ◮ Economically small reductions in resiliency and price efficiency ◮ Result on depth potentially driven by reduced demand for liquidity (e.g. Parlour and Seppi (2003)) ◮ Consistent with a positive role of safeguarding liquidity provision ◮ Market making exemption ◮ Ownership transfers
Road map Introduction Methodology and data Average impact The role of high-frequency market-making Institutional trading Conclusion
Two groups of stocks ◮ SLP stocks: special program of Euronext, rebates for HFTs providing liquidity if they subscribe to the program. ◮ Non SLP stocks: smaller stocks without this feature, HFT less prevalent. Variable/Group SLP Non SLP > 1 bln % volume % l.o. % volume % l.o. HFT 27.5 27.3 16.9 3.7 Mixed 56.4 55.4 55.7 65.2 Non HFT 16.0 17.3 27.3 31.0 ◮ Dutch SLP stocks as a control for French SLP stocks ◮ Few control stocks non SLP > 1 bln EUR ⇒ stocks < 1 bln EUR as control for non MM stocks
Four groups of stocks Median cancellation time ( ms ) 20 ▲ ◆ 15 ◆ ● FR SLP ▲ ■ NL SLP ◆ ▲ ◆ ◆ ◆ ◆ ◆ ◆ FR Non SLP 10 ◆ ◆ ◆ ◆ ◆ ◆ ◆ ▲ NL Non SLP ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ▲ ▲ ◆ ▲ ◆ ◆ ◆ ● ◆ ◆ ◆ ■ ■ ◆ ◆ ▲ ◆ 5 ▲ ● ◆ ● ◆ ◆ ◆ ◆ ◆ ■ ■ ◆ ◆ ■ ■ ◆ ◆ ◆ ■ ▲ ◆ ■ ◆ ◆ ◆ ■ ● ■ ◆ ■ ■ ● ■ ● ◆ ▲ ● ■ ◆ ◆ ■ ● ● ▲ ◆ ▲ ◆ ◆ ● ● ● ● ● ■ ■ ◆ ■ ◆ ■ ● ● ● ■ ● ■ ▲ ● ● ▲▲ ■ ● ● ■ ● ● ● ● ■ ● ■ ● ● ● ■ ● ■ ● ● ● ■ ▲ ▲ ▲ ◆ ● ▲ ● ● ● ◆ ◆ ● ■ ● ● ● ● ▲ ◆ ● ● ● ● ● ● 19 Log Volume 0 ▲ 12 13 14 15 16 17 18
Impact of the FTT on SLP and non SLP stocks Variable/Group SLP Non SLP Log Volume -0.032 -0.225*** (-0.69) (-3.46) Volatility 0.479 2.612** (0.51) (2.29) Range -0.069 0.272** (-0.62) (2.11) Effective Spread 0.175 1.144** (1.58) (2.23) Price Impact 0.181 1.805*** (1.37) (5.65) Depth -12.750*** -2.265 (-2.72) (-1.19) Resiliency -0.008 -0.027*** (-0.82) (-3.03) AR 0.009** 0.008 (2.24) (1.52)
Impact on price range - SLP stocks
Impact on price range - Non SPL stocks Price range - Non SLP - 0.031 0.29 July 2 August 1 September 3 October 1
Wrap-up ◮ More adverse impact on stocks without HFT Market-makers ◮ Volume: tax-exempt market-making activity clouds impact on volume ◮ Liquidity: higher adverse selection ◮ Two potential mechanisms ◮ Change in trading population, informed/uninformed ◮ Change in behavior or trading strategy
Gains on market orders and limit orders Variable Horizon HFT Mixed Non HFT Price impact 10s 5.46 3.62 3.14 5min 6.12 5.16 4.26 30min 6.53 5.95 4.59 Realized spread 10s 4.25 2.15 2.06 5min 3.19 1.17 0.64 30min 2.51 0.85 -0.08
Recommend
More recommend
