Does Trading Remove or Cause Friction?

William T. Lin, David Sun and Shih-Chuan Tsai

Emerging Markets Finance and Trade, 2012, vol. 48, issue S4, 33-53

Abstract: This study shows that trading causes friction in the market. However, when the market opens, trading of individuals removes market friction, while that of institutional trading does not. The situation during the rest of the day is just the opposite. The uneven behavior of trading noise across investors and time of day makes it a specific, rather than general, transaction cost, contrary to Stoll's (2000) finding. Intraday trading activity suppresses both order width and depth, as proxies for trading intensity, and therefore creates noise or friction in the market. Our findings support the proposed financial transaction tax in the European Union.

Keywords: herding; noise; order book; search model; transaction cost (search for similar items in EconPapers)
Date: 2012
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