When do Regulatory Interventions Work?
37 Pages Posted: 19 Feb 2021
Date Written: May 24, 2020
Regulators worldwide have introduced measures such as a fee on high order-to-trade ratio (OTR) to slow down high frequency trading, which existing research shows as having mixed results about its impact on market quality. We study a natural experiment in the Indian stock market where such a fee was introduced twice, with subtle differences in the implementation driven by different motivations. Using a difference-in-difference regression that exploits microstructure features, we find causal evidence of lower aggregate OTR and higher market quality when the fee was used to manage limited exchange infrastructure but little to no change in either OTR or market quality when it was used for a regulatory need to slow down high frequency trading.
Keywords: Algorithmic trading, financial regulation, market efficiency, market liquidity, financial derivatives
JEL Classification: G14, G18
Suggested Citation: Suggested Citation