Do High-Frequency Traders Improve Your Implementation Shortfall?

Volume 18, No. 1, 2020
Robert A. Korajczyk and Dermot Murphy

We take advantage of a regulatory change that effectively imposed a “tax” on HFT order activity on Canadian equity venues to study the resulting effect on the execution costs of
large institutional trades.We find that bid–ask spreads increase and price impact decreases for these trades following the regulatory change. The price impact effect is strongest for
informed institutional traders. Our evidence indicates that this tax on high-frequency trading is associated with higher transaction costs for small, uninformed trades and
lower transaction costs for large, informed trades. Hence, the tax increased the subsidy for informed traders from uninformed traders.