Algorithmic Trading and Fragmentation
The Journal of Trading Fall 2017, 12 (4) 18-28; DOI:10.3905/jot.2017.12.4.018
Posted: 10 Jun 2019
Date Written: March 15, 2017
Prior studies on algorithmic trading (AT) have mostly focused on a single exchange. The authors use a public dataset provided by the Securities and Exchange Commission (SEC) covering all major U.S. exchanges to study the impact of AT and its fragmentation on market liquidity. Using a proxy of AT derived from trade to order volume ratio, they find that AT concentrated on a single exchange improves liquidity. However, AT fragmentation onto multiple exchanges is associated with deterioration in liquidity. Their findings suggest a market-making as well as predatory role of AT and have policy implications.
Keywords: Algorithmic Trading; Liquidity; Market Fragmentation
Suggested Citation: Suggested Citation