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Order-to-trade ratios and market liquidity

Author

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  • Friederich, Sylvain
  • Payne, Richard

Abstract

We study the impact on market liquidity of the introduction of a penalty for high order-to-trade ratios (OTRs), implemented by the Italian Stock Exchange to curtail high-frequency quote submission. We find that the fee is associated with a collapse in the quoted depth of the stocks that make up the bulk of trading in Italian equities and with an increase in price impacts of trading across the treated stocks. Spreads do not change, however. Stocks from a pan-European control sample show no such liquidity changes. Thus, the Italian OTR fee had the effect of making Italian stocks markets more shallow and less resilient. Large stocks are more severely affected than midcaps. We also find evidence of a limited decrease in turnover. Consolidated liquidity, constructed by aggregating across all electronic trading venues for these stocks, decreases just like that on the main exchange. Thus, liquidity was not simply diverted from the main exchange, it was reduced in aggregate.

Suggested Citation

  • Friederich, Sylvain & Payne, Richard, 2015. "Order-to-trade ratios and market liquidity," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 214-223.
  • Handle: RePEc:eee:jbfina:v:50:y:2015:i:c:p:214-223
    DOI: 10.1016/j.jbankfin.2014.10.005
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    References listed on IDEAS

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    Cited by:

    1. Sandrine Jacob Leal & Mauro Napoletano, 2016. "Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High- Frequency Trading," Sciences Po publications 2016-12, Sciences Po.
    2. repec:eee:jeborg:v:157:y:2019:i:c:p:15-41 is not listed on IDEAS
    3. Oliver Linton & Soheil Mahmoodzadeh, 2018. "Implications of High-Frequency Trading for Security Markets," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 237-259, August.
    4. repec:eee:finmar:v:37:y:2018:i:c:p:1-16 is not listed on IDEAS
    5. Clapham, Benjamin & Gomber, Peter & Panz, Sven, 2017. "Coordination of circuit breakers? Volume migration and volatility spillover in fagmented markets," SAFE Working Paper Series 196, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    6. Nidhi Aggarwal & Venkatesh Panchapagesan & Susan Thomas, 2019. "When do regulatory interventions work?," Working Papers id:13040, eSocialSciences.
    7. repec:eee:ecmode:v:67:y:2017:i:c:p:307-315 is not listed on IDEAS
    8. Capelle-Blancard, Gunther, 2017. "Curbing the growth of stock trading? Order-to-trade ratios and financial transaction taxes," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 48-73.
    9. Veryzhenko, Iryna & Harb, Etienne & Louhichi, Waël & Oriol, Nathalie, 2017. "The impact of the French financial transaction tax on HFT activities and market quality," Economic Modelling, Elsevier, vol. 67(C), pages 307-315.
    10. repec:wly:isacfm:v:24:y:2017:i:2-3:p:73-79 is not listed on IDEAS
    11. repec:eee:finana:v:63:y:2019:i:c:p:27-39 is not listed on IDEAS
    12. Daniel Ladley, 2019. "The Design and Regulation of High Frequency Traders," Discussion Papers in Economics 19/02, Division of Economics, School of Business, University of Leicester.
    13. Iryna Veryzhenko & Lise Arena, 2017. "A Reexamination of High Frequency Trading Regulation Effectiveness in an Artificial Market Framework," Post-Print halshs-01444738, HAL.

    More about this item

    Keywords

    High-Frequency Trading; Order-to-trade ratios; Limit order trading; Computerized trading; Italian Stock Exchange;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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