Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs
44 Pages Posted: 26 Jul 2016 Last revised: 27 Jan 2020
Date Written: July 24, 2017
We show that behind the aggregate effects of algorithmic and high-frequency trading (AT/HFT) lies rich heterogeneity in the effects of individual traders/algorithms. Using unique regulatory data, we find that the most harmful traders double the costs of executing institutional parent orders. Beneficial traders offset much of this increase. HFTs are no more likely to increase institutional trading costs than non-HFTs. We identify other characteristics that distinguish harmful and beneficial traders. The paper explains why AT/HFT appear detrimental to some investors despite being beneficial or benign in aggregate.
Keywords: Algorithmic Trading, High-Frequency Trading, Liquidity, Transaction Costs, Implementation Shortfall, Predatory Trading
JEL Classification: G14
Suggested Citation: Suggested Citation