Algorithmic Trading, Liquidity, and Price Discovery: An Intraday Analysis of the SPI 200 Futures

26 Pages Posted: 8 Apr 2014

See all articles by Tina Viljoen

Tina Viljoen

University of Sydney Business School

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Hui Zheng

Discipline of Finance, The University of Sydney; Capital Markets CRC Limited

Date Written: May 2014

Abstract

We study the intraday price impact of algorithmic trading (AT) on futures markets. We find that AT exhibits a strong reverse U‐shape intraday pattern, and greater AT activity is related to lower effective spreads, higher realized spreads and lower adverse selection risk, which suggests that algorithmic traders strategically enter the market when transaction costs and information asymmetry are lower. AT is associated with an increase in transaction costs in the subsequent intraday period mainly through an increase in the adverse selection risk, and is positively related to both public and private information. Our results strongly suggest that algorithmic traders are informed and contribute to liquidity and price discovery on the futures markets.

Keywords: algorithmic trading, futures markets, market liquidity, price discovery

JEL Classification: G10, G13, G14

Suggested Citation

Viljoen, Tina and Westerholm, P. Joakim and Zheng, Hui, Algorithmic Trading, Liquidity, and Price Discovery: An Intraday Analysis of the SPI 200 Futures (May 2014). Financial Review, Vol. 49, Issue 2, pp. 245-270, 2014. Available at SSRN: https://ssrn.com/abstract=2422133 or http://dx.doi.org/10.1111/fire.12034

Tina Viljoen (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

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

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

Hui Zheng

Discipline of Finance, The University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 3915 (Phone)
+61 2 9351 6461 (Fax)

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

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