CTT reduced market activity!

Impact of CTT on gold

Impact of commodities transaction tax (CTT) on gold derivatives markets, analysis based on ultra-high frequency order flow and trade data studied by Satya Sai Harsha Dutta, Joshy Jacob, Jayanth R. Varma. They says, “We investigate the impact of the imposition of the CTT on the market quality of the commodities derivatives in India using high-frequency order and trade data.”

 

Their collected data allows to examine impact by trader type and the mechanism through which the regulatory shock impacts market quality. The results, based on a difference-in- difference approach, indicate that there is a significant deterioration in the market quality measures such as volume, spread, depth, order-fill time, volatility, and the autocorrelation of intraday returns.

 

They presented their papers India Gold Policy Centre, IIMA organised Conference on Gold & Gold Markets, held recently in January.

 

According to the papers, the research is based on the limit order book model of Focault et al. (2005), Theoretically determine the effect of a transaction tax on liquidity. Accordingly, the imposition of CTT leads to an increase in the proportion of patient traders and reduction in market activity.

 

Consequently, papers find that the limit orders have become aggressive in the post-CTT market. The paper improves the understanding of the transmission of transaction tax-induced shocks in financial markets.

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