Nidhi Aggarwal, Venkatesh Panchapagesan, Susan Thomas
Regulators worldwide have started to introduce measures like a fee on high order-to-trade ratio (OTR) to slow down high frequency trading. Previous studies on the OTR fee find mixed results for 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 being 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 the OTRs or market quality when it was used for a regulatory need to slow down high frequency trading.
Citation: When do regulatory hurdles work?, Nidhi Aggarwal, Venkatesh Panchapagesan and Susan Thomas,IGIDR Working Paper WP-2019-011, April 2019.