Paphos Life

Five years on, what have been the consequences of France’s transaction tax? A recent European Central Bank paper looked at the impacts on French equity markets, and for the most part it concludes that the outcomes of the tax were quite bad.

Market liquidity fell a lot, by 20% for affected stocks. Revenues were much lower than anticipated – an estimated €475m instead of the €1.6bn that had been predicted – “which once again points at an underestimation of the impact on revenue-generating market activity”.

Importantly, volatility rose and price efficiency fell, even though the tax exempted intraday trading (allowing “short-term arbitrageurs to continue eliminating price inefficiencies quickly”). Though the overall effect was small (but statistically significant), the rebate scheme masked a large effect on volatility in shares that were exempt.

The paper’s authors conclude that the French FTT had an overall negative impact on market quality, where reducing market liquidity led to less efficient pricing of assets and more volatile price movements, and effectively priced high-frequency trading out of existence altogether in affected shares. “The decrease in volume associated with the FTT hurt liquidity and crowded out “useful” trades.”