The CNMV analyses the effects of the introduction of the financial transaction tax in the spanish equity markets

The Spanish National Securities Market Commission (CNMV) has published a working paper assessing the impact of the introduction of the Financial Transaction Tax (FTT) on Spanish equity markets. The study analyses various dimensions of liquidity, volatility, and trading volume of the secondary markets where Spanish stocks are traded.
Two complementary analyses were conducted: a difference-in-differences methodology and a regression discontinuity analysis. The first methodology compares various parameters related to liquidity, volatility, and trading of Spanish equity markets before and after the introduction of the FTT, as well as a hypothetical scenario where the tax was not introduced. The second methodology examines the impact of the FTT on individuals affected by the measure and those who were not, by comparing their variables near the threshold of the tax. The article includes a description of the FTT, data sources and variables used, and the results of the two analyses. The article concludes with a discussion of the findings and their implications.
The study concludes that the tax had little effect on bid-ask spreads, but it reduced the trading volume of stocks, leading to a slight deterioration in liquidity dimensions measured by the Amihud ratio. The volatility increased in the short term but tended to decrease in the long term. Additionally, the tax may have shifted some OTC trading to MiFID secondary markets. The study indicates that the design of the tax may have reduced long-term incentives for some investors to participate in the market. The liquidity of large-cap companies was not affected, but for companies closer to the capitalisation threshold of 1 billion euros, bid-ask spreads and the Amihud ratio may have increased only in the short term without any significant effects in the medium and long term.