macrocephalopod

Liquidity becomes lolquidity

South Korea has a 10bp transaction tax and no obvious liquidity problems.

I guess it really matters what the profit margins of HFT options MMs here are. I don't think in a lot of cases they can absorb 10bp.

They wouldn’t continue quoting the same spreads if there was a transaction tax! Spreads would widen but more volume would be transacted near the NBBO because there is more profit margin built in for market makers. Not obvious that it’s worse for liquidity.

I mean. I suppose but at the end of the day liquidity in the standard sense of measurement (width of bid-ask) would likely decrease substantially, especially on fairly liquid tickers, no?

Yes but the quoted bid-ask is not the main cost you pay when executing an order — the price slippage is. Saw an article earlier today which said you can frequently trade 1% of ADV in SK at the top of book price — that never happens in US.

I thought your whole thing re: liquidity was that trading moves the price more than it used to (eg thinner books, orders being pulled when the price moves toward them etc). A transaction tax fixes some of that (with other costs of course).

I'm not tracking why a transaction tax fixes that.