Sand in the Chips? Evidence on Taxing Transactions in Modern Markets Jean-Edouard Colliard and Peter Hoffmann European Central Bank - Financial Research 10th Annual Central Bank Workshop on the Microstructure of Financial Markets - October 3rd, 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 ◮ Impact on different clienteles ◮ Transaction costs (Implementation shortfall)
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 ◮ relative increase in informed trading ◮ HFT MMs able to avoid being picked off ⇒ 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 trading volume for funds with ◮ high turnover (Amihud and Mendelson (1986)) ◮ scope for asset substitution (Campbell and Froot (1994)) ◮ Institutional trading costs (implementation shortfall) did not increase significantly ⇒ confirms muted average effect on market liquidity
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 (Shleifer and Vishny (1990)) ◮ 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 and MM/Prop/Agency/Other (Source: 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 ◮ It turns out that HFT market making is heavily concentrated in the most active French stocks ◮ Idea: Split sample into groups with and without HFT MM % of trading volume by each category: Trader/Group MMGroup Non-MM Group Client 18.4 30.5 Proprietary 44.7 65.0 MM 32.5 HFT 27.5 17.0 Mixed 56.4 55.8 NonHFT 16.0 27.2 Nb. stocks 49 36
◮ AEX25 and Dutch stocks with low cancelation times control for MM stocks ◮ Few control stocks without HFT MM > 1 bln EUR ⇒ stocks < 1 bln EUR as control for non MM stocks French Dutch FTT × MM 49 stocks, MM 22 stocks, MM FTT × No MM 36 stocks, No MM FTT × No MM 28 stocks, No MM 29 stocks, No MM
Four groups of stocks
Impact of the FTT on MM and non MM stocks Variable/Group MM Stocks Non MM Stocks Volume -0.079* -0.187*** (-1.70) (-3.01) Range -0.157 0.279** (-1.29) (2.27) Effective spread 0.093 0.866* (0.79) (1.92) Price impact 0.142 1.556*** (0.96) (5.17) Depth -15.023*** -1.966 (-2.79) (-1.15) Resiliency -0.015 -0.027*** (-1.35) (-2.93) AR 0.008* 0.008 (1.91) (1.56)
Impact on price range - MM stocks 1.0 0.5 0.0 � 0.5 � 1.0 � 0.18 � 0.16 June 1 July 2 August 1 September 3 October 1
Impact on price range - Non MM stocks 0.5 0.0 � 0.5 � 1.0 � 0.058 0.28 June 1 July 2 August 1 September 3 October 1
Wrap-up ◮ More adverse impact on stocks without HFT MM ◮ 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
Trader types Non MM Group MM Group Category/Variable limit/total p. impact limit/total p. impact HFT 12.0 6.0 50.3 3.2 Mixed 58.7 5.1 49.2 2.9 Non HFT 57.2 4.1 53.7 1.7
Impact of the FTT on non MM stocks Category/Variable Trading volume Price impact Effective spread HFT 0.083 1.767*** -0.000 (0.29) (3.66) (-0.00) Mixed -0.219*** 1.961*** 0.899* (-2.63) (5.54) (1.87) Non HFT -0.008 2.309*** 1.637** (-0.08) (4.73) (2.34)
HFT Volume 0.5 0.0 � 0.5 � 1.0 � 1.5 � 2.0 � 2.5 15. � 8.6 � June 1 July 2 August 1 September 3 October 1
Mixed Volume 0.2 0.0 � 0.2 � 0.4 � 0.6 � 0.8 � 27. � � 20. � June 1 July 2 August 1 September 3 October 1
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