International Evidence on Algorithmic Trading
Singapore Management University - Lee Kong Chian School of Business
Kingsley Y. L. Fong
University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)
Juan (Julie) Wu
University of Nebraska at Lincoln
September 17, 2015
AFA 2013 San Diego Meetings Paper
We study the effect of algorithmic trading (AT) intensity on equity market liquidity, short-term volatility, and informational efficiency between 2001 and 2011 in 42 equity markets around the world. On average, AT improves liquidity and informational efficiency but increases volatility. We can attribute the AT-related increase in volatility neither to more “good” volatility that would arise from faster price discovery nor to algorithmic traders’ inclination to enter the market when volatility is high. On the contrary, these volatility-seeking traders are associated with declines in market quality. Our results are surprisingly consistent across markets and thus across a wide range of AT practices. But results vary in the cross-section of stocks. In contrast to the average effect, greater AT intensity reduces liquidity and worsens the volatility increase in the smallest tercile of stocks. Finally, AT becomes less beneficial when market making is difficult.
Number of Pages in PDF File: 46
Keywords: Algorithmic trading, high frequency trading, market structure
JEL Classification: G19, G15
Date posted: March 15, 2012 ; Last revised: September 18, 2015
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