When do Regulatory Interventions Work?

Regulators worldwide have introduced measures such as a fee on high order-to-trade ratio (OTR) to slow down high frequency trading, which existing research shows as having mixed results about its impact on market quality. We study a natural experiment in the Indian stock market where such a fee was introduced twice, with subtle differences in the implementation driven by different motivations. Using a difference-in-difference regression that exploits microstructure features, we find causal evidence of lower aggregate OTR and higher market quality when the fee was used to manage limited exchange infrastructure but little to no change in either OTR or market quality when it was used for a regulatory need to slow down high frequency trading