Do Retail Investors Suffer from High Frequency Traders?

Using a change in regulatory fees in Canada in April, 2012, that affected predominantly high-frequency market makers (HFMMs), we analyze the causal impact of their activity on trading costs. The message fee caused the number of trades, quotes, and cancellations to drop by 30% driven by a proportionally even larger decrease in HFMMs order submissions. As a result, market-wide bid-ask spreads increased by 13%, retail investors paid 9% larger effective spreads and 30% fewer of their aggressive orders traded. The implementation shortfall for institutional trades that used marketable orders also increased by almost 29%. The study thus provides causal evidence for the importance of high frequency market making for market-wide liquidity and retail and institutional investors' trading costs.