TY - JOUR
T1 - Does trading remove or cause friction?
AU - Lin, William T.
AU - Sun, David S.
AU - Tsai, Shih Chuan
PY - 2012/11/1
Y1 - 2012/11/1
N2 - 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.
AB - 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.
KW - herding
KW - noise
KW - order book
KW - search model
KW - transaction cost
UR - https://www.scopus.com/pages/publications/84872960813
UR - https://www.scopus.com/pages/publications/84872960813#tab=citedBy
U2 - 10.2753/REE1540-496X4806S403
DO - 10.2753/REE1540-496X4806S403
M3 - Article
AN - SCOPUS:84872960813
SN - 1540-496X
VL - 48
SP - 33
EP - 53
JO - Emerging Markets Finance and Trade
JF - Emerging Markets Finance and Trade
IS - SUPPL.4
ER -