Time to Slow Down for High-Frequency Trading? Lessons from Artificial Markets

In this paper, we focus on the French cancel order tax implemented on 1 August 2012. We question the effectiveness of the modified tax with no exemptions and we analyze its impact on market quality, measured by liquidity, volatility and efficiency. Additionally, this paper raises the question whether this tax leads to a reduction of high-frequency trading (HFT) activities and a decline in trading volume. Based on our findings we report that introduction of cancel order tax only slightly reduces HFT activities, but it significantly affects market liquidity, increases market volatility and leads to deteriorating market efficiency. We conclude that it is difficult to dissuade investors from entering into unproductive trades and eliminate negative outputs of HFT (such as price manipulations) through tax, without altering the benefits of HFT like liquidity provision and efficient price discovery.