International Evidence on Algorithmic Trading

Boehmer, Ekkehart; Fong, Kingsley Y. L.; Wu, Julie

doi:10.2139/ssrn.2022034

Cited by 176 publications

(127 citation statements)

References 39 publications

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“…2 Interestingly, the widespread concerns about the negative impact of HFT on institutional trading costs are in sharp contrast to the findings of a few recent academic studies. Academic evidence so far seems to suggest that, predominantly, HFT is associated with improved market liquidity, reduced volatility, and increased price efficiency/discovery; see, for example, Chaboud et al (2009), Brogaard (2010), Hendershott et al (2011), Boehmer et al (2012), Menkveld (2012), Hasbrouck and Saar (2013), Brogaard et al (2013), and Malinova, Park and Riordan (2013). The evidence produced by these studies is consistent with the view that HFT firms are the modern day version of market makers with enhanced technology.…”

Section: Introductionsupporting

confidence: 61%

“…Using message counts as a proxy for algorithmic trading (AT), Hendershott et al (2011) find that AT improves liquidity and brings about more efficient price discovery. With the same proxy, Boehmer et al (2012) document that on average AT improves liquidity and informational efficiency. Another study by Chaboud et al (2009) also documents that algorithmic traders increase their supply of liquidity over the hour following macroeconomic data releases, even though they restrict activity in the minute following each release.…”

Section: Related Literaturementioning

confidence: 99%

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A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors

Tong

2013

SSRN Journal

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Combining data on high frequency trading (HFT) activities of a randomly selected sample of 120 stocks and data on institutional trades, I find that HFT increases the trading costs of traditional institutional investors. One standard deviation increase in the intensity of HFT activities increases institutional execution shortfall costs by a third. Further analysis suggests that HFT represents as an ephemeral and extra-expensive source of liquidity provision when demand and supply among institutional investors are imbalanced, and that the impact on institutional trading costs is most pronounced when high frequency (HF) traders engage in directional strategies (e.g., front-running).I perform various analyses to rule out an alternative explanation that HF traders are attracted to stocks that have high trading costs. First, HFT is most active on liquid stocks. Second, the results are robust to the controls for stable stock liquidity characteristics and events that might jointly affect HFT and trading costs. Third, an analysis of the HFT behavior around the temporary short selling ban in September 2008 highlights the opportunistic nature of liquidity provision by HF traders. Finally, Granger causality tests show that intensive HFT activity significantly contributes to institutional trading costs, but not vice versa.

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Section: Introductionsupporting

confidence: 61%

Section: Related Literaturementioning

confidence: 99%

A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors

Tong

2013

SSRN Journal

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“…This finding is consistent with Boehmer et al (2015) who show that greater algorithmic trading intensity is associated with more liquidity for average firm size, the same is not true for small market cap firms. For these firms, when algorithmic trading increases, liquidity declines.…”

Section: Ecb Working Paper 2020 February 2017supporting

confidence: 89%

High Frequency Trading and Fragility

Cespa

Vives

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may No 2020 / February 2017 AbstractWe show that limited dealer participation in the market, coupled with an informational friction resulting from high frequency trading, can induce demand for liquidity to be upward sloping and strategic complementarities in traders' liquidity consumption decisions: traders demand more liquidity when the market becomes less liquid, which in turn makes the market more illiquid, fostering the initial demand hike. This can generate market instability, where an initial dearth of liquidity degenerates into a liquidity rout (as in a flash crash). While in a transparent market, liquidity is increasing in the proportion of high frequency traders, in an opaque market strategic complementarities can make liquidity U-shaped in this proportion as well as in the degree of transparency. These episodes seem to have in common the fact that illiquidity brings more illiquidity, contrary to the dynamic that in normal market conditions illiquidity, by moderating the demand for immediacy, produces a self-stabilizing effect. In a crash, in contrast, an increase in illiquidity fosters a disorderly "run for the exit," accentuating the price movement.In the paper we trace this source of fragility to the fact that modern markets' pervasive presence of automated trading hampers market participants' access to (i) trade, and (ii) quote information. That is, two frictions shape trading activity nowadays: a participation friction (not all liquidity suppliers are continuously present in the market), and an informational friction (not all traders have access to timely market information).We model these two computerized-trading related frictions in a two-period dynamic noisy rational expectations model. We consider risk-averse dealers who provide liquidity to two cohorts of risk-averse, short-term traders who receive a common endowment shock. Dealers can be "full", with a continuous market presence as stylized high frequency traders (HFTs), or only be present in the first period market. In the first round of trade both dealers' types absorb the (market) orders of the first traders' cohort. In the second trading round, only full dealers participate. Full dealers can therefore accommodate the reverting orders of the first traders' cohort, as well as those of the incoming second cohort who only observe an imperfect signal about the first period order imbalance.We show that dealers' limited market participation favors the ...

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“…For example, Boehmer, Fong and Wu (2012) find that co-location increases the volume of high-frequency trading and improves market quality, and Brogaard, Hendershott and Riordan (2013) nanoseconds. These changes led to substantial increases in the number of cancelled orders without much change in overall trading volume, bid-ask spreads or depths.…”

Section: Effects Of Hft On Market Liquidity and Transaction Costsmentioning

confidence: 99%