Curbing the growth of stock trading? Order-to-trade ratios and financial transaction taxes

•The increase in securities trading over the past few decades has been spectacular.•The Italian market provide a unique opportunity to examine order-to-trade ratio (OTR) and financial transaction tax (FTT).•This paper relies on difference-in-difference and regression discontinuity design.•Neither th...

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Bibliographic Details
Published in:	Journal of international financial markets, institutions & money institutions & money, 2017-07, Vol.49, p.48-73
Main Author:	Capelle-Blancard, Gunther
Format:	Article
Language:	eng
Subjects:	Borsa Italiana Economics and Finance Financial transaction tax High-frequency trading Humanities and Social Sciences Italian Stock Exchange Liquidity Order-to-trade ratio Securities transaction tax Tobin tax Volatility
Online Access:	Get full text
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Summary:	•The increase in securities trading over the past few decades has been spectacular.•The Italian market provide a unique opportunity to examine order-to-trade ratio (OTR) and financial transaction tax (FTT).•This paper relies on difference-in-difference and regression discontinuity design.•Neither the OTR nor the FTT had a meaningful impact. The growth of financial markets provokes regular debate, particularly in Europe, and in the aftermath of the global crisis a number of reforms have been proposed. In particular, two regulatory measures have been put forward: order-to-trade ratios and transaction taxes. This paper aims to quantify the impact of such initiatives. To do so, I consider market liquidity and volatility in the Italian Stock Exchange (Borsa Italiana) over the 2011–2013 period, which provides a unique opportunity for empirical assessment: first, a penalty for high order-to-trade ratios (OTR) was implemented in April 2012; second, a transaction tax on securities (STT) was introduced in March 2013 on Italian large and mid-caps; third, this tax was extended to derivatives in September 2013 (FTT). I identify causality via a difference-in-difference approach (with German firms and Italian small caps, when appropriate, as control groups) and a regression discontinuity design. I find that neither the OTR nor the STT/FTT had a meaningful impact on market liquidity or volatility. There was however a substantial drop in OTC trading.
ISSN:	1042-4431 1873-0612