Is it Efficient to Impose Costs on Small-Volume Equity Traders?

Paul Clyde

International Journal of the Economics of Business, 1999, vol. 6, issue 1, 81-92

Abstract: A securities market that imposes higher trading costs on small-volume traders may reduce free-riding on information generated by large-volume traders. The reduction in free-riding increases the probability that large-volume traders will invest in socially beneficial information and engage in costly monitoring of managers of firms in their portfolio.V arious mechanisms can be used to impose costs on small-volume traders.We argue that Nasdaq's former treatment of limit orders was one such mechanism. Depending on the market's structure and the nature of the securities traded in the market, a reduction in freeriding activity may improve overall market efficiency despite a potentially negative impact on information dissemination.

Keywords: Limit Orders; Market Microstructure; Information (search for similar items in EconPapers)
Date: 1999
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DOI: 10.1080/13571519984331

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