Bank regulation therefore calls for larger liquidity buffers. The FTT is effectually a tax on market liquidity and thus works counter to the intention of liquidity regulation. As liquidity in secondary markets is intentionally reduced by introducing an FTT, one should expect higher investor premiums in primary markets. This will raise funding costs in many markets, including for government debt.
Very many transactions are undertaken by financial institutions on behalf of non-financial companies in order to mitigate risks of fluctuation of currencies, raw materials etc. Higher costs of such insurance would likely lead to less risk mitigation, or in other words more “speculative” exposures. As regards volatility in financial markets it is doubtful that less liquid markets would reduce such volatility.