Effects of securities transaction taxeson depth and bid-ask spread

This note investigates the effects of introducing a transaction tax ondepth and bid-ask spread using a static model where a competitive market makerfaces informed and liquidity traders. When the degree of information asymmetryis low, an increase in the transaction tax can result into a smaller rise in the sellingprice and the depth may even increase in some cases.When information asymmetryis high, the dealer could increase the selling price more than the tax and sometimeslowers the depth. This can result in a market shutdown if the liquidity trader isdriven out of the market....