Do Retail Investors Suffer from High Frequency Traders?

52 Pages Posted: 6 Dec 2012 Last revised: 11 Jan 2018

See all articles by Katya Malinova

Katya Malinova

McMaster University - Michael G. DeGroote School of Business

Andreas Park

University of Toronto - Finance Area

Ryan Riordan

Smith School of Business

Date Written: January 11, 2018

Abstract

Using a change in regulatory fees in Canada in April, 2012, that affected predominantly high-frequency market makers (HFMMs), we analyze the causal impact of their activity on trading costs. The message fee caused the number of trades, quotes, and cancellations to drop by 30% driven by a proportionally even larger decrease in HFMMs order submissions. As a result, market-wide bid-ask spreads increased by 13%, retail investors paid 9% larger effective spreads and 30% fewer of their aggressive orders traded. The implementation shortfall for institutional trades that used marketable orders also increased by almost 29%. The study thus provides causal evidence for the importance of high frequency market making for market-wide liquidity and retail and institutional investors' trading costs.

Keywords: high frequency trading, message tax, market quality, retail traders

JEL Classification: G14, G18

Suggested Citation

Malinova, Katya and Park, Andreas and Riordan, Ryan, Do Retail Investors Suffer from High Frequency Traders? (January 11, 2018). Available at SSRN: https://ssrn.com/abstract=2183806 or http://dx.doi.org/10.2139/ssrn.2183806

Katya Malinova

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Andreas Park (Contact Author)

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Ryan Riordan

Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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