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Exploring the dynamic impact of transaction taxes on market quality in HFT and non-HFT environments: An agent-based modeling approach

Author

Listed:
  • Wang, Liming
  • Sun, Xuchu
  • Zhu, Hongliang
  • Li, Tangrong

Abstract

This paper investigates the relationship among transaction taxes, high-frequency trading (HFT), and market quality. We use the agent-based modeling (ABM) approach to dynamically assess the impact of transaction taxes on market quality with and without high-frequency trading. Preliminary tests indicate that high-frequency trading negatively affects market quality, whereas imposing a moderate transaction tax rate may improve market quality in both scenarios. However, when the transaction tax rate further increases, market quality may be impaired. The adverse effect of a higher tax rate is more pronounced in markets without HFT participation. The findings reveal that the impact of transaction taxes on market quality varies with investor composition and tax rates, offering insights into the diversity of transaction tax policies across global stock markets.

Suggested Citation

  • Wang, Liming & Sun, Xuchu & Zhu, Hongliang & Li, Tangrong, 2025. "Exploring the dynamic impact of transaction taxes on market quality in HFT and non-HFT environments: An agent-based modeling approach," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:ecofin:v:76:y:2025:i:c:s1062940824002857
    DOI: 10.1016/j.najef.2024.102360
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