Algorithmic Trading and Market Quality: International Evidence

Journal of Financial and Quantitative Analysis

47 Pages Posted: 15 Mar 2012 Last revised: 15 May 2020

See all articles by Ekkehart Boehmer

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 - Lincoln

Date Written: May 12, 2020

Abstract


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 inferences of AT on market quality. On average, AT improves liquidity and informational efficiency but increases short-term volatility. Importantly, 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, buy-side institution execution costs

JEL Classification: G12, G14

Suggested Citation

Boehmer, Ekkehart and Fong, Kingsley Y. L. and Wu, J. (Julie), Algorithmic Trading and Market Quality: International Evidence (May 12, 2020). Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=2022034 or http://dx.doi.org/10.2139/ssrn.2022034

Ekkehart Boehmer

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 )

UNSW Business School
High St
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 (Contact Author)

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588
United States

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