Algorithmic trading and market quality: International evidence

Algorithmic trading and market quality: International evidence

We study the effect of algorithmic trading (AT) on market quality between 2001 and 2011 in 42 equity markets around the world. We use an exchange colocation service that increases AT as an exogenous instrument to draw causal inferences about AT on market quality. On average, AT improves liquidity an...

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Bibliographic Details
Main Authors: BOEHMER, Ekkehart, FONG, Kingsley, WU, Juan Julie
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2020
Subjects:
Algorithmic trading
market quality
high frequency trading
buy-side institution
execution costs
Corporate Finance
Finance and Financial Management
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/6685
https://ink.library.smu.edu.sg/context/lkcsb_research/article/7684/viewcontent/AT_Sep2019_sv.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:We study the effect of algorithmic trading (AT) on market quality between 2001 and 2011 in 42 equity markets around the world. We use an exchange colocation service that increases AT as an exogenous instrument to draw causal inferences about AT on market quality. On average, AT improves liquidity and informational efficiency but increases short-term volatility. Importantly, AT also lowers execution shortfalls for buy-side institutional investors. Our results are surprisingly consistent across markets and thus across a wide range of AT environments. We further document that the beneficial effect of AT is stronger in large stocks than in small stocks.

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