Algorithmic Trading and Market Quality: International Evidence

Abstract

We study the effect of algorithmic trading (AT) on market quality between 2001 and 2011 in 42 equity markets around the world. We use an exchange colocation service that increases AT as an exogenous instrument to draw causal inferences about AT on market quality. On average, AT improves liquidity and informational efficiency but increases short-term volatility. Importantly, AT also lowers execution shortfalls for buy-side institutional investors. Our results are surprisingly consistent across markets and thus across a wide range of AT environments. We further document that the beneficial effect of AT is stronger in large stocks than in small stocks.

When do Regulatory Interventions Work?

“…The speed advantage can also allow traders to react to news quickly and improves the informational efficiency of prices. These arguments find support in the empirical literature which finds that higher levels of algorithmic trading improves securities markets quality (Angel et al, 2011;Hendershott et al, 2011;Hasbrouck and Saar, 2013;Frino et al, 2014;Boehmer et al, 2012;Brogaard et al, 2014).…”

Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity, and Trading Costs

“…The effect of fast trading on volatility has been examined by several studies, some of which report the effect to be negative (Hasbrouck and Saar (2013), Brogaard, Hendershott, and Riordan (2014)), while others show it to be positive (Zhang (2010), Boehmer, Fong, and Wu (2018)). In a theoretical model, Du and Zhu (2015) predict that volatility may increase when some traders are faster than others.…”

Effect of Insider Trading on Market Efficiency

“…It is then declared that due to the internal commerce and its strict key components that make the merchandising sufficient and efficacious, and without it can probably make people earn wrong and lucrative money on the overhead of other work agents. This implies the capacity to bear upon the informational boon linked to the analysis of (Boehmer, Fong, & Wu, 2018). The prerogative states that for efficient merchandizing certain standards must be fulfilled.…”