Impact of Algorithmic Trading on Market Quality: A Reconciliation

45 Pages Posted: 19 Sep 2017 Last revised: 3 Aug 2018

See all articles by Michael Tseng

Michael Tseng

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Soheil Mahmoodzadeh

University of Cambridge - Faculty of Economics

Ramazan Gencay

Simon Fraser University

Date Written: July 12, 2018

Abstract

Whether high frequency algorithmic trading has positive or negative impact on market quality remains an unsettled question. The literature has provided opposing answers, often in similar market settings. One strand of literature suggests that algorithmic trading improves market efficiency by enhancing liquidity and facilitating price discovery. On the other hand, it has also been documented that algorithmic traders use their technological advantage to extract rent from other market participants and thereby increase their transaction cost. In this paper, we provide a case study where these two opposing findings can be reconciled, via a comprehensive analysis of a high frequency dataset.

Keywords: Market Quality, Algorithmic Trading, High Frequency Econometrics, Foreign Exchange Market

JEL Classification: C58, F31, G14

Suggested Citation

Tseng, Michael and Mahmoodzadeh, Soheil and Gencay, Ramazan, Impact of Algorithmic Trading on Market Quality: A Reconciliation (July 12, 2018). Available at SSRN: https://ssrn.com/abstract=3038542 or http://dx.doi.org/10.2139/ssrn.3038542

Michael Tseng (Contact Author)

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

HOME PAGE: http://sfi.epfl.ch/cms/site/sfi/lang/en/michaeltseng

Soheil Mahmoodzadeh

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
243
rank
121,365
Abstract Views
926
PlumX Metrics