When do regulatory hurdles work?

Nidhi Aggarwal, Venkatesh Panchapagesan, Susan Thomas

The paper analyses two instances when an orders-to-trades ratio fee was used as a hurdle to algorithmic trading in the Indian equity market. In the first instance, the fee was charged to manage the increased load on limited exchange bandwidth, while in the second, the fee was used to address public interest concerns. We use a difference- in-difference estimation strategy to identify the causal impact of the fee in both instances. We find that the orders-to-trades reduced, on average, after the first fee. As a consequence, liquidity improved and liquidity risk decreased. There was little or no change in the orders- to-trades ratio or market quality in response to the second fee. We conclude that interventions with clearly defined objectives are more likely to realise desired outcomes.

Citation: When do regulatory hurdles work?, Nidhi Aggarwal, Venkatesh Panchapagesan, Susan Thomas,FRG working paper, October 2017.