The Effects of Reducing the Securities Transaction Tax on Day Trading: Evidence from the Taiwan Stock Market

We have examined the 30 most actively-traded stocks for one year before and one year after the day trading transaction tax reduction implemented on April 28, 2017. Our findings show that the tax reduction increased market quality as measured by trading value, trading volume, turnover, volatility and liquidity while matching their prior untreated stocks using a propensity-score matching approach. When we use the difference-indifferences approach, qualitatively similar results also apply except for volatility, which has no significant effect. Furthermore, we investigate the effects of the tax reduction on the transaction impact as measured by the day trading volume, day trading ratio, margin netting and the margin netting ratio. The empirical results show that the day trading volume and the day trading ratio are positive and statistically significant, whereas the margin netting and the margin netting ratio are negative and statistically significant. These findings are robust to the two above-mentioned statistical approaches. Overall, the policy of reducing the securities transaction tax (STT) on day trading has improved market quality and resulted in the substitution of day trading for margin trading in the period.