Securities Transaction Tax and Market Quality - The Case of France

The French Securities Transaction Tax (STT) implementation on August 1st, 2012, is considered a landmark development within securities markets regulation. However, until today the controversy about possible drawbacks and applicability has not reached a conclusion and consequences for market quality are yet to be thoroughly assessed. In this light a rigorous evaluation on the STT’s effect on market quality is highly desirable and would provide guidance for academics, regulators and practitioners alike. On this basis, we provide evidence that trading demand and likewise supply significantly drop after the introduction of the STT. Even though the French proposal exempts professional liquidity providing activities, we find increased spread levels and a strong decline in top order book depth resulting in additional transaction costs for market participants beside the tax. Most alerting, as the STT affects trading on all French listing venues, we find this deterioration in market quality threatening inter-market information transmission by impairing price coordination among the European fragmented markets.