Throttling hyperactive robots - Order to Trade Ratios at the Oslo Stock Exchange

Transcription

1 Throttling hyperactive robots - Order to Trade Ratios at the Oslo Stock Exchange Kjell Jørgensen, b,d Johannes Skjeltorp a and Bernt Arne Ødegaard d,c a Norges Bank b BI Norwegian Business School c Norwegian School of Economics (NHH) d University of Stavanger (UiS) Stern Microstructure Meeting, May 20, 2016

2 Background A perceived need to do something about HFT Deal to regulate financial markets and products and curb high-frequency trading. Press release introducing MiFID II (European Parliament) Suggested regulative actions: Transaction Tax (Tobin tax) Minimum Resting Time Increased Tick Sizes Market Making Obligations Call Auctions Circuit Breakers Order to Trade Ratios

3 Summary Issue Change of fee calculation for traders at the Oslo Stock Exchange (OSE) Targeted at High Frequency Traders Who potentially pays? Traders sending lots of messages (order entries, updates or deletions) with little trading. (Ratio 70:1) Questions raised Do traders change their behaviour? Are there any undesirable effects?

4 Summary II We find Traders do change their behaviour Less messages per trade, larger trade sizes Little evidence of undesirable effects at the OSE. Trading quality measures (liquidity) at the Oslo Stock Exchange are not worsening, rather the opposite. Effects on OSE s competitors in OSE listed stocks (Nasdaq OMX Stockholm, Chi-X...) Spreads widen somewhat Depth decreases somewhat Trading volume (turnover) No flight to other markets (Lit and Dark/OTC)

5 Introduction of the Order to Executed Order Ratio at the OSE Measure was announced by the Exchange on May 25, 2012 To be implemented starting September 1, 2012 From the press release: With effect from 1 September, Oslo Børs will introduce a fee that will affect unnecessarily high order activity in the stock market. The purpose of the fee is to discourage orders that do not contribute to the effective and sound conduct of stock market trading. The fee will be linked to an Order to Executed Order Ratio (OEOR) of 1:70. This means that the fee will be charged where the number of orders input relative to each order carried out exceeds 70.

6 Implementation details The calculation of the ratio is done on a monthly basis. The actual fee is NOK 0.05 per order that exceeds the ratio of 70:1 during the month. In the calculation the OSE does not count every order. Specifically, the following activity is not counted: Orders that rest unchanged for more than one second from order entry. Order amendments that improve price, volume, or both. Execute and Eliminate (ENE) and Fill or Kill (FOK) orders What does count: Orders residing less than one second, from order insert or the last amendment, before cancelation Order amendments that degrade price, volume, or both, of an order that has resided for less than one second in the trading system.

7 Introduction of similar regulation Italy Introduced a similar scheme in April 2010 Different calculation Daily payments No reward for liquidity provision Academic investigation (?) Liquidity deteriorates Total depth ( 15%) Depth away from the best quotes. Consolidated liquidity also deteriorates.

8 Introduction of similar regulation II Canada Introduced a change in cost recovery fees in April 2012 From market shares of trading volume to market shares of trading volume and market shares of messages Exemptions for registered market makers (not informal HFT market makers) Academic investigation (?) Market activity dropped by 30% Market wide spreads rose by 9% Both institutional and retail traders incur higher adverse selection costs on their limit orders

9 Data Oslo Stock Exchange data: Complete orderbook data for OSE listed stocks. ThompsonReuters Tick History Database: Orders, trades and state of the order book for OSE listed stocks at alternative marketplaces in Europe. Also information on Dark/OTC trading of OSE listed stocks. Sample period: September 2011 through November 2012 Stocks in sample: Only common stocks. Leave out stocks with less than 100 trading days in a given year.

10 The Oslo Stock Exchange Main market for trading Norwegian stocks. Until MiFID, allmost all trading of Norwegian stocks at the OSE. Currently, trading is fragmented across many market venues. Fraction Trading Volume OSE vs other markets in XBO Volume LSE BTE TRQ CHI STO OSE Time

11 What were OTRs at the OSE? Order to Trade Ratios, 2011 Frequency Order to Trade Ratio Distribution of daily Order to Trade Ratios for all liquid stocks on the OSE in 2011.

12 The largest (market wide) OTR in a given stock in 2011 The Largest Order to Trade Ratio each company, 2011 Frequency Order to Trade Ratio

13 Market wide OTRs for Statoil, :5 Statoil Order to Trade Ratio 2010: : Jan Apr Aug Dec Apr Jul Oct Feb May

14 Empirical Investigation The OTR fee was announced on May 25, Started running Sep 1, Empirical strategy: Compare Empirical Market Quantities After: Sep-Nov 12 Before: Previous Fall: Sep-Nov 11 (comparable w.r.t. seasonality) Previous Spring: Jan May (closer in time)

15 Market Participant Reactions - Cross-section by OTR Max OTR 11 Averages Test for equality(p-value) Fall 11 Spring 12 Fall 11 Spring 12 Fall 12 vs Fall 12 vs Fall 12 OTR OTR< (0.36) 3.2 (0.00) OTR [50,70] (0.79) -0.0 (0.99) OTR> (0.00) -5.2 (0.00) Trade Size OTR< (0.00) 2.4 (0.01) (10 3 NOK) OTR [50,70] (0.00) -4.7 (0.00) OTR> (0.01) -1.7 (0.10) Turnover(%) OTR< (0.00) -8.0 (0.00) OTR [50,70] (0.41) -5.0 (0.00) OTR> (0.00) -7.0 (0.00)

16 Market Participant Reactions - Cross-section by size Sort stocks into four size quartiles Size Averages Quartile Fall 11 Spring 12 Fall 12 Order to Trade Ratio 1 (small) Trade size (thousands NOK) 1 (small) Turnover(%) 1 (small) (Numbers in bold are significantly different from Fall 12)

17 What happens to market quality? Market quality measures Depth (Thousand NOK) Relative Spread (%) Effective Spread (%) Realized Spread (%) Realized Volatility (%) Roll Measure (%)

18 What happens to market quality? Averages Fall 11 Spring 12 Fall 12 Depth(thousands NOK) Relative Spread(%) Effective Spread(%) Realized Spread(%) Realized volatility(%) Roll(%) (Numbers in bold are significantly different from Fall 12)

19 Market quality on the aggregate market place Aggregate trades across all European Market Places Reuters XBO feed Only prices and quantities, no limit order books. Fall 11 Spring 12 Fall 12 Realized volatility (%) Roll measure (%) (Numbers in bold are significantly different from Fall 12)

20 Leakages? A possible reaction from traders to the fee at the OSE: Trade elsewhere Look at Fractions traded on different market venues Fall 11 Spring 12 Fall 12 Oslo All lit markets OTC/Dark markets

21 Estimating effects of the policy change Diff in diffs Standard method for investigating effects of policy intervention: Diff in Diff Calculate differences for two groups those affected by policy intervention those not affected In this case: Properties of stock (liquidity) Trading in Oslo Trading at some other market place (pick the market place with most trading) Diff in diff simplified by being differences concerning same stock in two places (no need for controls).

22 Diff in Diff analysis Fall 11 vs Fall 12 Spring 12 vs Fall 12 Oslo Comparison γ (Diff Oslo Comparison γ (Diff in diff) in diff) n Depth (thousand) Average change (0.30) (0.88) (0.09) (0.10) (0.26) (0.39) Median change Relative Spread (%) Average change (0.11) (0.38) (0.12) (0.04) (0.02) (0.08) Median change Relative Effective Spread (%) Average change (0.77) (0.29) (0.23) (0.11) (0.55) (0.44) Median change Relative Realized Spread (%) Average change (0.00) (0.92) (0.37) (0.02) (0.09) (0.91) Median change Roll(%) Average change (0.81) (0.18) (0.44) (0.76) (0.05) (0.42) Median change Realized Volatility(%) Average change (0.00) (0.00) (0.02) (0.13) (0.21) (0.60) Median change

23 Conclusion The Oslo Stock Exchange introduced on September 1. an OTR fee in order to throttle hyperactive HFTs. Traders responded by lowering their OTRs - No one has ever paid the fee. The effect on market quality at the OSE in terms of liquidity is positive. This is in stark contrast to the cases of Italy and Canada where liquidity worsen after the introduction of OTR fees. Due to difference in regulatory design? Trading do not migrate to alternative market venues and there are signs of reduced liquidity here.

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