Transaction Taxes in a Price Maker/Taker Market

65 Pages Posted: 19 Mar 2010 Last revised: 11 Nov 2014

Dale W. R. Rosenthal

University of Illinois at Chicago - Department of Finance

Nordia D. M. Thomas

University of Wisconsin - La Crosse; University of Illinois at Chicago

Hefei Wang

University of Illinois at Chicago - Department of Finance

Date Written: November 10, 2014

Abstract

We develop a price maker/taker model to study how a financial transaction tax affects markets where potential traders take a price or quote prices for the next potential trader. We find taxes widen quoted and effective spreads by many times the tax; significantly reduce asset prices, gains from quoting, gains from trade, and volume; and, do not eliminate destabilizing speculators. These effects are amplified in markets with intermediation. Volatility may decrease slightly without intermediation but increases significantly with intermediation. We find some early evidence of tax effects predicted by our model.

Keywords: transaction tax, Tobin tax, market microstructure, limit order model, market makers, high-frequency trading, search costs

JEL Classification: C72, D44, G19

Suggested Citation

Rosenthal, Dale W. R. and Thomas, Nordia D. M. and Wang, Hefei, Transaction Taxes in a Price Maker/Taker Market (November 10, 2014). UIC College of Business Administration Research Paper No. 10-13; Midwest Finance Association 2013 Annual Meeting Paper; UIC College of Business Administration Research Paper No. 10-13. Available at SSRN: https://ssrn.com/abstract=1572648 or http://dx.doi.org/10.2139/ssrn.1572648

Dale W. R. Rosenthal (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~daler

Nordia D. M. Thomas

University of Wisconsin - La Crosse ( email )

1725 State Street
La Crosse, WI 54601
United States
608-785-6655 (Phone)

University of Illinois at Chicago ( email )

601 S Morgan Street
UH 2450, MC 294
Chicago, IL 60607-7124
United States
312.545.4092 (Phone)
312.413.0385 (Fax)

HOME PAGE: http://www2.uic.edu/~nthoma4

Hefei Wang

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-8374 (Phone)

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