When is the order-to-trade ratio fee effective?

Nidhi Aggarwal, Venkatesh Panchapagesan and Susan Thomas

Journal of Financial Markets, 2023, vol. 62, issue C

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.

Keywords: Algorithmic trading; Financial regulation; Market efficiency; Market liquidity; Financial derivatives (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:62:y:2023:i:c:s1386418122000532

DOI: 10.1016/j.finmar.2022.100762

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