Download this Paper Open PDF in Browser

Taxing High Frequency Market Making: Who Pays the Bill?

48 Pages Posted: 6 Dec 2012 Last revised: 24 Jun 2016

Katya Malinova

University of Toronto

Andreas Park

University of Toronto - Finance Area

Ryan Riordan

Queen's School of Business

Date Written: June 14, 2016

Abstract

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.

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

JEL Classification: G14, G18

Suggested Citation

Malinova, Katya and Park, Andreas and Riordan, Ryan, Taxing High Frequency Market Making: Who Pays the Bill? (June 14, 2016). Available at SSRN: https://ssrn.com/abstract=2183806 or http://dx.doi.org/10.2139/ssrn.2183806

Katya Malinova

University of Toronto ( email )

Department of Statistical Sciences
Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://individual.utoronto.ca/kmalinova/

Andreas Park (Contact Author)

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Ryan Riordan

Queen's School of Business ( email )

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

Paper statistics

Downloads
1,159
Rank
13,869
Abstract Views
5,864