Algorithmic Trading and Market Quality: International Evidence
45 Pages Posted: 15 Mar 2012 Last revised: 8 Aug 2018
Date Written: 2018
We study the effect of algorithmic trading (AT) on market quality between 2001 and 2011 in 42 equity markets around the world. We use exchange co-location service that increases AT as an exogenous instrument to draw causal inference of AT on market quality. On average, AT improves liquidity and informational efficiency but increases short-term volatility. AT also lowers execution shortfalls for buy-side institutional investors. Our results are surprisingly consistent across markets and thus across a wide range of AT environments. We further document that the beneficial effect of AT is stronger in large stocks than in small stocks.
Keywords: Algorithmic trading, high frequency trading, market structure
JEL Classification: G19, G15
Suggested Citation: Suggested Citation