Abstract
This paper makes use of the natural experiment created by the introduction of ASIC’s cost recovery regulation on January 1, 2012, to examine the impact of the regulation on high frequency trading (HFT) and market quality in Australia. We employ the order-to-trade ratio (OTT) as a proxy for HFT trades and examine the relationship between high OTT trading activities and liquidity based market quality metrics. We perform a 2SLS IV fixed effect regression to address the endogeneity issue between liquidity measures, volatility and share prices. Overall, we find a reduction in OTT, relative quoted spreads and relative effective spreads, and an increase in quoted dollar depth after the introduction of the regulation.
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