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

Tina Viljoen

University of Sydney Business School

Hui Zheng

Discipline of Finance, The University of Sydney; Capital Markets CRC Limited

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: October 17, 2011

Abstract

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

Viljoen, Tina and Zheng, Hui and Westerholm, P. Joakim, Liquidity and Price Discovery of Algorithmic Trading: An Intraday Analysis of the SPI 200 Futures (October 17, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1913693 or http://dx.doi.org/10.2139/ssrn.1913693

Tina Viljoen (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Hui Zheng

Discipline of Finance, The University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 3915 (Phone)
+61 2 9351 6461 (Fax)

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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