The Role of Algorithmic Trading in Stock Liquidity and Commonality in Electronic Limit Order Markets

Posted: 6 Jun 2013 Last revised: 19 Apr 2018

See all articles by Hiroshi Moriyasu

Hiroshi Moriyasu

Nagasaki University

Marvin Wee

Australian National University (ANU); Financial Research Network (FIRN)

Jing Yu

The University of Western Australia - Department of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2018

Abstract

Using the adoption of the Arrowhead trading platform in January 2010 as an exogenous event, we investigate the effects of algorithmic trading on stock market liquidity and commonality in liquidity under different market conditions on the Tokyo Stock Exchange. After controlling for endogeneity, we find algorithmic trading increases stock liquidity by narrowing spreads and increasing market depth. Furthermore, algorithmic trading increases commonality in liquidity at both high and low frequency. These findings appear to arise due to the reduction in monitoring costs. Further analysis reveals that, following large market declines, the effect of algorithmic trading on spreads and market depth weakens while the effect on commonality in stock liquidity intensifies.

Keywords: Algorithmic trading, Liquidity, Commonality in liquidity, Market decline

JEL Classification: G14, G24

Suggested Citation

Moriyasu, Hiroshi and Wee, Marvin and Yu, Jing, The Role of Algorithmic Trading in Stock Liquidity and Commonality in Electronic Limit Order Markets (April 1, 2018). Pacific-Basin Finance Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2274631

Hiroshi Moriyasu

Nagasaki University ( email )

Katafuchi
Nagasaki, 850-8506
Japan

Marvin Wee

Australian National University (ANU) ( email )

The Australian National University
College of Business and Economics
Canberra, 2601
Australia
+61 2 61250416 (Phone)

Financial Research Network (FIRN)

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

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

Jing Yu (Contact Author)

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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