The Effects of Algorithmic Trading on Security Market Quality
Michael J. Aitken
UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)
University of Sydney - Discipline of Finance; Financial Research Network (FIRN)
University of Sydney; Capital Markets CRC Limited
Frederick H. deB. Harris
Wake Forest University ; Capital Markets CRC Limited (CMCRC)
April 30, 2014
We estimate in a systems framework the effect of algorithmic trading on security market quality, defined to include market manipulation at the close, information leakage prior to price-sensitive announcements, and effective spreads. Using cancellation proxies to identify AT, we show that greater AT can reduce market manipulation and information leakage as well as spreads. The data cover all securities on the London Stock Exchange and on NYSE-Euronext Paris four years before and after MiFID1. MiFID1 increased leakage and spreads with mixed effects on market manipulation. We address robustness to end-of-quarter reporting deadlines, analyze the over-identifying restrictions, and perform both Hausman and Stock-Yogo tests of the exogeneity and strength of our AT instruments.
Number of Pages in PDF File: 53
Keywords: algorithmic trading, high frequency trading, market quality, market integrity, manipulation, information leakage
JEL Classification: G28
Date posted: May 23, 2014
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