10 August 2022

Patrick Thöni wins Best Paper Doctoral Award


Patrick Thöni and his co-author Vincent Wolff have shed light on the black box of questions on how asymmetric information and financial taxation affect trading activity and market liquidity in a multi-market setting. For their article Multi-Market Effects of Financial Transaction Taxes, they have now received Swiss Finance Institute Best Paper Doctoral Award.

In 2011 the president of the European Commission José Barroso officially presented a plan to create a new financial transactions tax to, as he marked, "make the financial sector pay its fair share" and since then there has been debate on the impact of such a tax on the financial sector of the European member states.

A pan-European European financial transaction tax (FTT) failed to obtain support by all EU member states, but the tax has been implemented unilaterally by France, Italy, and Spain.

This recent development is restricted to the EU, but forms of financial taxes have been proposed and introduced many times and in numerous countries. Regardless of its various implementations and the prolific literature it has sparked, the literature was, until Patrick Thöni and his co-autor Vincent Wolff did their study, silent about the FTT’s effects on multiple markets.

The black box of questions that have now been unpacked read: What are the effects of an FTT across connected markets like stocks and their derivatives? When taxing stocks, does trading volume migrate to its derivative market through synthetic replication? How does a tax affect the composition of informed and liquidity traders? When taxing OTC trading activity, does it crop up on-exchange? Should the same tax rate be applied to the underlying and its derivative?

Focus on the tax design

The award winners conclude: “First, we find an asymmetric responses of stock versus derivative taxation. Taxing stock markets has a stronger effect on trading activity than taxing derivative markets if the same tax rate is applied.

Second, tax design has a significant effect on outcomes in terms of volume and market liquidity. While Italy experienced a significant reduction in liquidity without any effects on volume, stock markets in France and Spain experienced the opposite effect.

In light of our theoretical predictions, we are able to argue that these effects are largely due to different implementations of the tax policy. Third, while our results are limited to regulated markets, we find no evidence for the often-expressed possibility to replace stocks by synthetic derivatives in order to avoid taxation.

Finally, our results have potential policy implications. Under the premise that a FTT is introduced to support public finances, policy makers have to strictly focus on the tax design and particularly on the tax exemptions. As we see with the cases of France/Spain in comparison to Italy, the tax design and its exemptions crucially dictates its success.

Further, under the premise that the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system” (IMF, 2009), policy makers have to reassess its exemptions for the major market participants as currently the tax burden is mostly passed through to the non-financial market participants. The contribution of the financial sector is in that case neither fair nor substantial.”

Vincent Wolff presented the paper at Swiss Finance Institute Research Days leading to the Swiss Finance Institute Best Paper Doctoral Award. Curious about their work? Then red their paper here.