Impact of Algorithmic Trading on Speed of Adjustment to New Information: Evidence from Interest Rate Derivatives

23 Pages Posted: 11 Mar 2020

See all articles by Zeyang Zhou

Zeyang Zhou

University of Wollongong - School of Accounting, Economics & Finance

Michael Garcia

University of Wollongong

Alex Frino

University of Wollongong

Date Written: December 11, 2019

Abstract

This study examines the impact of algorithmic trading (AT) on the speed of adjustment and price discovery during scheduled macroeconomic announcements for interest rate derivatives. In February 2012, the Australian Securities Exchange (ASX) introduced co-location services for futures traders. This change in market structure increases AT and, in this study, we examine price efficiency for both exchange-traded futures and over-the-counter (OTC)-traded swaps in the pre- and post-AT periods. Our results demonstrate that, in the presence of AT, the speed of adjustment to new information has improved for both futures and swaps. In addition, we find that the price discovery contribution of the futures market improves in the post-AT period, with this improvement significant for announcement days. We conclude that AT stimulates market adjustment to new information and enhances the price discovery of futures on days with scheduled macroeconomic releases.

Keywords: Microstructure; Sydney Futures Exchange; Timezones; Information Announcements

JEL Classification: G10, G14, G15

Suggested Citation

Zhou, Zeyang Ivy and Garcia, Michael and Frino, Alex, Impact of Algorithmic Trading on Speed of Adjustment to New Information: Evidence from Interest Rate Derivatives (December 11, 2019). Available at SSRN: https://ssrn.com/abstract=3540637 or http://dx.doi.org/10.2139/ssrn.3540637

Zeyang Ivy Zhou (Contact Author)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia

Michael Garcia

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Alex Frino

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

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