Securities Transaction Tax and Market Quality - the Case of France

We study the French Securities Transaction Tax implementation of 1 August 2012. Although a similar tax is planned to be introduced across 11 European countries, consequences for market quality are yet to be thoroughly assessed. We show that liquidity demand and supply significantly drop. Even though the French proposal exempts professional liquidity provision, we find increased spreads and a declined order book depth resulting in additional transaction costs for market participants besides the tax. As all venues trading French stocks are affected, we further find that STT threatens inter-market information transmission by impairing price coordination among fragmented markets in Europe.