Nidhi Aggarwal , Venkatesh Panchapagesan , Susan Thomas
{"title":"When is the order-to-trade ratio fee effective?","authors":"Nidhi Aggarwal , Venkatesh Panchapagesan , Susan Thomas","doi":"10.1016/j.finmar.2022.100762","DOIUrl":null,"url":null,"abstract":"<div><p>Regulators use measures such as a fee on high order-to-trade ratio (OTR) to slow down high-frequency trading. Their impact on market quality is, however, mixed. We study a natural experiment in the Indian stock market where such a fee was introduced twice, with differences in motivation and implementation. Using a difference-in-difference approach, we find that the fee decreased OTR and improved market quality when it was imposed on all orders, while it had little effect when it was imposed selectively on some orders. Improvement in liquidity was driven by a reduction in adverse selection costs following lower OTR.</p></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"62 ","pages":"Article 100762"},"PeriodicalIF":2.1000,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"1","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Financial Markets","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1386418122000532","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 1
Abstract
Regulators use measures such as a fee on high order-to-trade ratio (OTR) to slow down high-frequency trading. Their impact on market quality is, however, mixed. We study a natural experiment in the Indian stock market where such a fee was introduced twice, with differences in motivation and implementation. Using a difference-in-difference approach, we find that the fee decreased OTR and improved market quality when it was imposed on all orders, while it had little effect when it was imposed selectively on some orders. Improvement in liquidity was driven by a reduction in adverse selection costs following lower OTR.
期刊介绍:
The Journal of Financial Markets publishes high quality original research on applied and theoretical issues related to securities trading and pricing. Area of coverage includes the analysis and design of trading mechanisms, optimal order placement strategies, the role of information in securities markets, financial intermediation as it relates to securities investments - for example, the structure of brokerage and mutual fund industries, and analyses of short and long run horizon price behaviour. The journal strives to maintain a balance between theoretical and empirical work, and aims to provide prompt and constructive reviews to paper submitters.