Algorithmic Trading and Market Quality

Abstract

A unique data set from NASDAQ OMX Nordic allows a deep analysis of trader types’ activity and provides evidence on the roles played in the trading ecosystem. We specifically investigate the impact of algorithmic traders on market quality relative to the activities of other market participants under various conditions. We find that relative to other traders, algorithmic traders contribute to lower spreads, especially during highly volatile markets, and provide more shares traded at the NBBO. We also identify the main determinants of algorithmic traders’ liquidity provisions and order cancellation patterns.

Keywords: HFT, Algorithmic Trading, Market Quality

JEL Classification: G20, G14, L10