Does trading remove or cause friction?

William T. Lin, David S. Sun, Shih Chuan Tsai

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This study shows that trading causes friction in the market. However, when the market opens, trading of individuals removes market friction, while that of institutional trading does not. The situation during the rest of the day is just the opposite. The uneven behavior of trading noise across investors and time of day makes it a specific, rather than general, transaction cost, contrary to Stoll's (2000) finding. Intraday trading activity suppresses both order width and depth, as proxies for trading intensity, and therefore creates noise or friction in the market. Our findings support the proposed financial transaction tax in the European Union.

Original languageEnglish
Pages (from-to)33-53
Number of pages21
JournalEmerging Markets Finance and Trade
Volume48
Issue numberSUPPL.4
DOIs
Publication statusPublished - 2012 Nov 1

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Keywords

  • herding
  • noise
  • order book
  • search model
  • transaction cost

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance(all)

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