Abstract

http://ssrn.com/abstract=1100635
 
 

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Does Algorithmic Trading Improve Liquidity?


Terrence Hendershott


University of California, Berkeley - Haas School of Business

Charles M. Jones


Columbia Business School - Finance and Economics

Albert J. Menkveld


VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance

August 30, 2010

Journal of Finance, Vol. 66, pp. 1-33
WFA 2008 Paper

Abstract:     
Algorithmic trading has sharply increased over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The NYSE automated quote dissemination in 2003, and we use this change in market structure that increases algorithmic trading as an exogenous instrument to measure the causal effect of algorithmic trading on liquidity. For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes.

Number of Pages in PDF File: 54

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Date posted: March 5, 2008 ; Last revised: July 27, 2011

Suggested Citation

Hendershott, Terrence and Jones, Charles M. and Menkveld, Albert J., Does Algorithmic Trading Improve Liquidity? (August 30, 2010). Journal of Finance, Vol. 66, pp. 1-33; WFA 2008 Paper. Available at SSRN: http://ssrn.com/abstract=1100635

Contact Information

Terrence J. Hendershott
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Charles M. Jones
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)
HOME PAGE: http://www.columbia.edu/~cj88/

Albert J. Menkveld (Contact Author)
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)
Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
Duisenberg School of Finance ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
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