Taxing High Frequency Market Making: Who Pays the Bill?
University of Toronto
University of Toronto - Finance Area
Queen's School of Business
June 14, 2016
In April 2012, the Canadian regulator IIROC imposed a fee on order submissions and cancellations. Worldwide, this was the first time that a regulator imposed a cost on activities that are intrinsic components of high frequency traders’ strategies. We find that high frequency market makers adjusted their behavior and acted significantly less competitively, so that market-wide bid-ask spreads rose by 9%, causing an increase in trading costs for retail traders. The implementation shortfall for institutions that used marketable orders increased, too, but for those that use both market and limit orders, costs remained unaffected. Our study provides causal evidence for the critical importance of liquidity provision by high frequency market makers in today’s markets.
Number of Pages in PDF File: 48
Keywords: high frequency trading, message tax, market quality, retail traders
JEL Classification: G14, G18
Date posted: December 6, 2012 ; Last revised: June 24, 2016