Liquidity and Price Discovery of Algorithmic Trading: An Intraday Analysis of the SPI 200 Futures
40 Pages Posted: 22 Aug 2011 Last revised: 16 Nov 2014
Date Written: October 17, 2011
We study the intra-day impact of algorithmic trading on the futures market to increase our understanding of algorithmic trading and its role in the price formation process. First, we find that algorithmic trading provides liquidity when the spread is wide and that algorithms enter the market at a series of intervals that decrease the spread. Second, we show that algorithmic trading is related to lower adverse selection and is unrelated to realised spreads. Third, we confirm that information asymmetry is highest at the beginning of the trading day, and as the price stabilises during the trading day, we find that the trade becomes the information carrier and algorithmic trading increases. Fourth, we find that algorithmic trades strategically enter the market during periods with less informed trading, while the period following exhibits higher public and private information. Our results suggest that algorithmic traders contribute to the price discovery process of financial markets.
Keywords: Algorithmic Trading, Futures Markets, Market Liquidity, Price Discovery
JEL Classification: G10, G13, G14
Suggested Citation: Suggested Citation