International Evidence on Algorithmic Trading

46 Pages Posted: 15 Mar 2012 Last revised: 18 Sep 2015

Ekkehart Boehmer

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)

J. (Julie) Wu

University of Nebraska at Lincoln

Date Written: September 17, 2015

Abstract

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.

Keywords: Algorithmic trading, high frequency trading, market structure

JEL Classification: G19, G15

Suggested Citation

Boehmer, Ekkehart and Fong, Kingsley Y. L. and Wu, J. (Julie), International Evidence on Algorithmic Trading (September 17, 2015). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2022034 or http://dx.doi.org/10.2139/ssrn.2022034

Ekkehart Boehmer (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

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

J. (Julie) Wu

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

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