Speed, Algorithmic Trading, and Market Quality Around Macroeconomic News Announcements

Tinbergen Institute Discussion Paper No. 12-121/III

70 Pages Posted: 14 Nov 2012

See all articles by Martin L. Scholtus

Martin L. Scholtus

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; Tinbergen Institute

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Date Written: November 12, 2012

Abstract

This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the order book (full order book).

Keywords: macroeconomic news, high frequency trading, latency costs, market activity, event-based trading

JEL Classification: E44, G10, G14

Suggested Citation

Scholtus, Martin Laurens and van Dijk, Dick J.C. and Frijns, Bart, Speed, Algorithmic Trading, and Market Quality Around Macroeconomic News Announcements (November 12, 2012). Tinbergen Institute Discussion Paper No. 12-121/III. Available at SSRN: https://ssrn.com/abstract=2174901 or http://dx.doi.org/10.2139/ssrn.2174901

Martin Laurens Scholtus (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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