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Is it Efficient to Impose Costs on Small-Volume Equity Traders?

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  • Paul Clyde

Abstract

A securities market that imposes higher trading costs on small-volume traders may reduce free-riding on information generated by large-volume traders. The reduction in free-riding increases the probability that large-volume traders will invest in socially beneficial information and engage in costly monitoring of managers of firms in their portfolio.V arious mechanisms can be used to impose costs on small-volume traders.We argue that Nasdaq's former treatment of limit orders was one such mechanism. Depending on the market's structure and the nature of the securities traded in the market, a reduction in freeriding activity may improve overall market efficiency despite a potentially negative impact on information dissemination.

Suggested Citation

  • Paul Clyde, 1999. "Is it Efficient to Impose Costs on Small-Volume Equity Traders?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(1), pages 81-92.
    • Handle: RePEc:taf:ijecbs:v:6:y:1999:i:1:p:81-92
    DOI: 10.1080/13571519984331
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    References listed on IDEAS

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