Algorithmic Trading and Market Quality: International Evidence
Journal of Financial and Quantitative Analysis
47 Pages Posted: 15 Mar 2012 Last revised: 15 May 2020
Date Written: May 12, 2020
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: Suggested Citation