When do Regulatory Interventions Work?

Abstract

Previous studies find mixed results about how a fee on high order-to-trade (OTR) ratios impacts market quality. Using a natural experiment where such a fee was introduced twice for different reasons, this paper finds evidence of impact only when the implementation matched the motive. We use a difference-in-difference regression, that exploits microstructure features, to 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.