Impact of Algorithmic Trading on Market Quality: A Reconciliation
45 Pages Posted: 19 Sep 2017 Last revised: 3 Aug 2018
Date Written: July 12, 2018
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
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