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Throttling hyperactive robots - Message to trade ratios at the Oslo Stock Exchange

Listed author(s):
  • Jørgensen, Kjell

    ()

    (Norwegian Business School (BI) and University of Stavanger)

  • Skjeltorp, Johannes Atle

    ()

    (Norges Bank)

  • Ødegaard, Bernt Arne

    ()

    (University of Stavanger (UiS) and Norwegian School of Economics (NHH))

We use the introduction of a cost on high message to trade ratios for traders at the Oslo Stock Exchange to investigate the effects on market quality and fragmentation of introduction of such ``speed bumps'' to equity trading. The exchange introduced a fee payable by market participants whose orders (messages to the exchange's trade system) exceeded seventy times the number of consummated trades. Market participants quickly adjusted their behavior to avoid paying the extra cost. The overall ratios of messages to trades fell, but common measures of the quality of trading, such as liquidity, transaction costs, and realized volatility, did not deteriorate, they were essentially unchanged. This is a policy intervention where we can match the treated sample (OSE listed stocks) with the same assets traded elsewhere. We can therefore do a ``diff in diff'' analysis of liquidity in Oslo compared with liquidity of the same asset traded on other exchanges. Surprisingly, we see that liquidity, as measured by the spread, deteriorated on alternative market places when the tax was introduced, a tax that is only valid for trading at the OSE. The spread is the only liquidity measure for which we observe this difference between the OSE and other markets, for depth and turnover we do not find any differences between other markets and the OSE.

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File URL: http://dl.dropboxusercontent.com/u/8078351/uis_wps_econ_fin/uis_wps_2014_3_jorgensen_skjeltorp_odegaard.pdf
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Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2014/3.

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Length: 48 pages
Date of creation: 18 Feb 2014
Handle: RePEc:hhs:stavef:2014_003
Contact details of provider: Postal:
University of Stavanger, NO-4036 Stavanger, Norway

Web page: http://www.uis.no/research/economics_and_finance

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  1. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
  2. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2015. "Equilibrium fast trading," Journal of Financial Economics, Elsevier, vol. 116(2), pages 292-313.
  3. Naes, Randi & Skjeltorp, Johannes A., 2006. "Order book characteristics and the volume-volatility relation: Empirical evidence from a limit order market," Journal of Financial Markets, Elsevier, vol. 9(4), pages 408-432, November.
  4. Øyvind Bøhren & Bernt Arne Ødegaard, 2001. "Patterns of Corporate Ownership: Insights from a unique data set," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 27, pages 55-86.
  5. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
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