When do Regulatory Interventions Work?

37 Pages Posted: 19 Feb 2021

See all articles by Nidhi Aggarwal

Nidhi Aggarwal

Indian Institute of Management (IIMU), Udaipur

Venkatesh Panchapagesan

Indian Institute of Management (IIMB), Bangalore

Susan Thomas

XKDR; Jindal Global University; Indira Gandhi Institute of Development Research (IGIDR)

Date Written: May 24, 2020

Abstract

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

Aggarwal, Nidhi and Panchapagesan, Venkatesh and Thomas, Susan, When do Regulatory Interventions Work? (May 24, 2020). Available at SSRN: https://ssrn.com/abstract=3761163 or http://dx.doi.org/10.2139/ssrn.3761163

Nidhi Aggarwal (Contact Author)

Indian Institute of Management (IIMU), Udaipur ( email )

Mohanlal Sukhadia University Campus
Udaipur, Rajasthan 313001
India

Venkatesh Panchapagesan

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Susan Thomas

XKDR ( email )

Bombay, India, 400059
India
00919821230385 (Phone)

Jindal Global University ( email )

Sonepath, Haryana, 131001
India

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
22-840-0919, ext 550 (Phone)
22-840-2752 (Fax)

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