THE IMPACT OF HIGH-FREQUENCY TRADING REGULATORY REGIMES ON EUROPEAN MARKET QUALITY

Abstract

I examine the impact of three different national regimes for regulating high-frequency trading: a licensure regime in Germany, establishment of an HFT order cancellation tax in Italy, and a combined order cancellation tax and general financial transactions tax in France. Using GARCH and EGARCH models, I find that the German regime significantly reduces the persistence of volatility shocks. The French regime significantly reduces long-run volatility, reduces the size of bid-ask spreads, and increases intraday volatility. It also weakly reduces volatility persistence and the sensitivity of bid-ask spreads to volatility. The Italian regime significantly reduces long-run volatility, increases the persistence of volatility shocks, increases intraday volatility, and reduces the sensitivity of bid-ask spreads to volatility. It weakly increases the size of bid-ask spreads. The French and German regimes were associated with a significant reduction in trade volume, which was not the case with the Italian regime. Overall, I find that the three regimes improve market quality more often than they detract from it.