SOME EFFECTS OF TRANSACTION TAXES UNDER DIFFERENT MICROSTRUCTURES

Abstract. We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, hetero-geneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may be-come inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists and thus a transaction tax may reduce volatility by crowding out speculative orders. 1