Do Retail Traders Suffer from High Frequency Traders?
University of Toronto; Copenhagen Business School
University of Toronto - Department of Economics; Copenhagen Business School
Queen's School of Business
November 18, 2013
Using a change in regulatory fees in Canada in April 2012 that affected high-frequency quote submissions and cancellations, we analyze the causal impact of algorithmic trading activities on the trading costs and intraday returns of retail and institutional traders. Following the change, the number of trades, quotes, and cancellations dropped by 30% and market-wide bid-ask spreads rose by 9%. Trading costs for market orders, measured by bid-ask spreads, increased for institutions, but remained unaffected for retail traders. Both groups incur higher adverse selection costs on their limit orders. Retail traders’ intraday returns, especially from limit orders, declined, while institutions’ returns from market orders increased.
Number of Pages in PDF File: 42
Keywords: high frequency trading, message tax, market quality, retail traders
JEL Classification: G14, G18
Date posted: December 6, 2012 ; Last revised: January 10, 2014
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