Intraday Return Predictability, Informed Limit Orders, and Algorithmic Trading
42 Pages Posted: 7 Nov 2015 Last revised: 30 Jul 2018
Date Written: July 10, 2018
I study the effect of algorithmic trading on the strategic choice of informed traders for market versus limit orders. I proxy for this choice by means of intraday return predictability from market and limit orders around the NYSE Hybrid Market introduction. My findings show that the increase in algorithmic trading by 16% leads to an increase in informed trading through both market and limit orders at the inner levels of the limit order book by 3.5% and 6.2%, respectively. The change in the informativeness of different order types depends on the change in the competition among algorithmic traders.
Keywords: intraday predictability, informed trading, algotihmic trading, limit order book
JEL Classification: G14
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