Do High-Frequency Traders Improve your Implementation Shortfall?

We take advantage of a regulatory change that effectively imposed a "tax" on HFT order activity on Canadian equity venues to study the resulting effect on the execution costs of large institutional trades. We find that bid-ask spreads increase and price impact decreases for these trades following the regulatory change. The price impact effect is strongest for informed institutional traders. Our evidence indicates that this tax on high-frequency trading is associated with higher transaction costs for small, uninformed trades and lower transaction costs for large, informed trades. Hence, the tax increased the subsidy for informed traders from uninformed traders.