Sand in the Chips? Evidence on Taxing Transactions in Modern Markets∗ Jean-Edouard Colliard and Peter Hoffmanny First version: December 2012 This version: May 30, 2014 Abstract We present evidence on the causal impact of financial transaction taxes on market quality in a modern market structure by exploiting the introduction of such a levy in France on August 1st, 2012. Our evidence suggests that the substantial changes in market structure over the past decades play an important role in reassessing the long-standing idea of the FTT. While we document a surprisingly mild impact on exchange-based trading due to exemptions for liquidity provision, off-exchange trading declined by 40%, and the largest OTC trades virtually disappeared. This suggests that market segmentation poses a considerable challenge to current policy proposals. Journal of Economic Literature Classification Number: G10, G14, G18, H32. Keywords: Financial transaction tax, OTC markets, liquidity, high-frequency trading. ∗We would like to thank Bruno Biais, Fany Declerck, Hans Degryse, Laurent Grillet-Aubert, Philipp Hartmann, Frank de Jong, Simone Manganelli, Elvira Sojli as well as seminar and conference participants at the French Treasury, Autorit´edes March´esFinanciers (AMF), ECB, VU University Amsterdam, the Banque de France Workshop on Algorithmic and High Frequency Trading, the 6th Erasmus Liquidity Conference and the Arne Ryde Workshop for comments and suggestions. The views expressed in this paper are the authors' and do not necessarily reflect those of the European Central Bank or the Eurosystem. yEuropean Central Bank, Financial Research Division. E-mail:
[email protected] and
[email protected]. Contact author: Peter Hoffmann, ECB, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.