Liquidity and Algorithmic Trading in Brazil

Abstract

This paper provides evidence of the effect of algorithmic trading (AT) in the liquidity of the Brazilian equity market. A wide debate on the literature asserts that AT may be both beneficial and harmful to market quality. The results of our econometric estimates for a sample of 47 stocks through mid-2017 to mid-2018 show that when a larger horizon is analyzed (20 minutes), the lagged effect of AT reduces market quality. However, the lagged effect of one-minute AT activity reduces both spreads and price impact. Still, the effect of AT on market quality is sensitive to the horizon which is being analyzed.

Keywords: Liquidity, Algorithmic trading, Spreads, Market microstructure

JEL Classification: G11, C58