Algorithmic Trading and the Market for Liquidity
University of California, Berkeley - Haas School of Business
University of Ontario Institute of Technology - Faculty of Business and Information Technology
April 11, 2012
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
We examine the role of algorithmic traders (AT) in liquidity supply and demand in the 30 DAX stocks on the Deutsche Boerse in January 2008. AT represent 52% of market order volume and 64% of nonmarketable limit order volume. AT more actively monitor market liquidity than human traders. AT consume liquidity when it is cheap, i.e., when the bid-ask quotes are narrow, and supply liquidity when it is expensive. When spreads are narrow AT are less likely to submit new orders, less likely to cancel their orders, and more likely to initiate trades. AT react more quickly to events and even more so when spreads are wide.
Number of Pages in PDF File: 45
Keywords: algorithmic trading, liquidity, market monitoring
JEL Classification: G10, G14Accepted Paper Series
Date posted: February 9, 2012 ; Last revised: April 12, 2012
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