Hostname: page-component-6bb9c88b65-vqtzn Total loading time: 0 Render date: 2025-07-24T23:46:31.016Z Has data issue: false hasContentIssue false
  • English
  • Français

Algorithmic Trading and Market Quality: International Evidence

Published online by Cambridge University Press:  13 October 2020

Ekkehart Boehmer ,
Kingsley Fong Open the ORCID record for Kingsley Fong [Opens in a new window]  and
Juan (Julie) Wu
Ekkehart Boehmer*
Affiliation:
Singapore Management University Lee Kong Chian School of Business
Kingsley Fong
Affiliation:
University of New South Wales Business Schoolk.fong@unsw.edu.au
Juan (Julie) Wu
Affiliation:
University of Nebraska–Lincoln College of Businessjuliewu@unl.edu
*
eboehmer@smu.edu.sg (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2659 - 2688
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

We thank Jennifer Conrad (the editor), Michael Goldstein, Joel Hasbrouck, Terry Hendershott, Vincent van Kervel (the referee), Elvira Sojli, and participants at the 2012 Institute Louis Bachelier Market Microstructure Conference, ATC/ECB Workshop on High Frequency Trading, 2016 Bank of England meeting, 2013 AFA meeting, 2015 FMA meeting, 2015 Workshop on the Mathematics of High Frequency Financial Markets (UCLA), Bocconi University, EDHEC Business School, EDHEC Risk Institute London, ESSEC, HKU, HKUST, HSE Moscow, Humboldt Universitaet Berlin, Imperial College, the Monetary Authority of Singapore, National University of Singapore, NTU, SAIF at Shanghai Jiao Tong University, SMU (Dallas), SMU (Singapore), Tinbergen Institute Amsterdam, Texas Christian University, Texas Tech University, Universitaet St. Gallen, University of Houston, University of Iowa, University of Nebraska-Lincoln, University of Rhode Island, University of Wyoming, and Warwick Business School for their helpful comments.

References

Anand, A.; Irvine, P.; Puckett, A.; and Venkataraman, K.. “Persistence in Trading Cost: An Analysis of Institutional Equity Trades.” Review of Financial Studies, 25 (2012), 557–598.CrossRefGoogle Scholar
Anand, A., and Venkataraman, K.. “Market Conditions, Fragility and the Economics of Market Making.” Journal of Financial Economics, 121 (2016), 327–349.CrossRefGoogle Scholar
Baron, M.; Brogaard, J.; Hagströmer, B.; and Kirilenko, A.. “Risk and Return in High-Frequency Trading.” Journal of Financial and Quantitative Analysis, 54 (2019), 993–1024.10.1017/S0022109018001096CrossRefGoogle Scholar
Baruch, S., and Glosten, L. R.. “Strategic Foundation for the Tail Expectation in Limit Order Book Markets.” Working Paper, Columbia University (2016).CrossRefGoogle Scholar
Bessembinder, H. “Issues in Assessing Trade Execution Costs.” Journal of Financial Markets, 6 (2003), 233–257.CrossRefGoogle Scholar
Boehmer, E., and Kelley, E.. “Institutional Investors and the Informational Efficiency of Prices.” Review of Financial Studies, 22 (2009), 3563–3594.CrossRefGoogle Scholar
Brogaard, J.; Hagstroemer, B.; Norden, L.; and Riordan, R.. “Trading Fast and Slow: Colocation and Market Quality.” Review of Financial Studies, 28 (2015), 3407–3443.CrossRefGoogle Scholar
Brogaard, J.; Hendershott, T.; and Riordan, R.. “High-Frequency Trading and Price Discovery.” Review of Financial Studies, 27 (2014), 2267–2306.CrossRefGoogle Scholar
Brunnermeier, M., and Pedersen, L. H.. “Predatory Trading.” Journal of Finance, 60 (2005), 1825–1863.CrossRefGoogle Scholar
Carrion, A. “Very Fast Money: High-Frequency Trading on the NASDAQ.” Journal of Financial Markets, 16 (2013), 680–711.CrossRefGoogle Scholar
Castura, J.; Litzenberger, R.; Gorelick, R.; and Dwivedi, Y.. “Market Efficiency and Microstructure Evolution in U.S. Equity Markets: A High-Frequency Perspective.” Working Paper, RGM Advisors (2010).Google Scholar
Chordia, T.; Goyal, A.; Lehmann, B.; and Saar, G.. “High-Frequency Trading.” Journal of Financial Markets, 16 (2013), 637–645.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Evidence on the Seed of Convergence to Market Efficiency.” Financial Journal of Economics, 76 (2005), 271–292.CrossRefGoogle Scholar
Conrad, J., and Wahal, S.. “The Term Structure of Liquidity Provision.” Journal of Financial Economics, 136 (2020), 239–259.CrossRefGoogle Scholar
Conrad, J.; Wahal, S.; and Xiang, J.. “High Frequency Quoting, Trading, and the Efficiency of Prices.” Journal of Financial Economics, 116 (2015), 271–291.CrossRefGoogle Scholar
Dai, L.; Parwada, J. T.; and Zhang, B.. “The Governance Effect of the Media's News Dissemination Role: Evidence from Insider Trading.” Journal of Accounting Research, 53 (2015), 331–366.CrossRefGoogle Scholar
Dichev, I.; Huang, K.; and Zhou, D.. “The Dark Side of Trading.” Journal of Accounting, Auditing & Finance, 29 (2014), 492–518.CrossRefGoogle Scholar
Egginton, J.; Van Ness, B. F.; and Van Ness, R. A.. “Quote Stuffing.” Financial Management, 45 (2016), 583–608.CrossRefGoogle Scholar
Gai, J.; Yao, C.; and Ye, M.. “The Externalities of High Frequency Trading.” Working Paper, University of Illinois at Urbana-Champaign (2014).Google Scholar
Hagströmer, B., and Nordén, L.. “The Diversity of High-Frequency Traders.” Journal of Financial Markets, 16 (2013), 741–770.CrossRefGoogle Scholar
Hasbrouck, J., and Saar, G.. “Technology and Liquidity Provision: The Blurring of Traditional Definitions.” Journal of Financial Markets, 12 (2009), 143–172.CrossRefGoogle Scholar
Hasbrouck, J., and Saar, G.. “Low-Latency Trading.” Journal of Financial Markets, 16 (2013), 646–679.CrossRefGoogle Scholar
Hendershott, T.; Jones, C.; and Menkveld, A.. “Does Algorithmic Trading Improve Liquidity?” Journal of Finance, 66 (2011), 1–33.CrossRefGoogle Scholar
Hendershott, T., and Riordan, R.. “Algorithmic Trading and the Market for Liquidity.” Journal of Financial and Quantitative Analysis, 48 (2013), 1001–1024.CrossRefGoogle Scholar
Jones, C. M. “What Do We Know about High-Frequency Trading?” Working Paper, Columbia University (2013).CrossRefGoogle Scholar
van Kervel, V., and Menkveld, A.. “High-Frequency Trading around Large Institutional Orders.” Journal of Finance, 74 (2019), 1091–1137.CrossRefGoogle Scholar
Kirilenko, A.; Kyle, A. S.; Samadi, M.; and Tuzun, T.. “The Flash Crash: The Impact of High Frequency Trading on an Electronic Market.” Journal of Finance, 72 (2017), 967–998.10.1111/jofi.12498CrossRefGoogle Scholar
Korajczyk, R., and Murphy, D.. “High Frequency Market Making to Large Institutional Trades.” Review of Financial Studies, 32 (2019), 1034–1067.CrossRefGoogle Scholar
Lee, C. M. C., and Ready, M. J.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733–746.CrossRefGoogle Scholar
Malinova, K.; Park, A.; and Riordan, R.. “Do Retail Traders Suffer from High Frequency Traders?” Working Paper, University of Toronto (2013).CrossRefGoogle Scholar
Menkveld, A. “High Frequency Trading and the New-Market Makers.” Journal of Financial Markets, 16 (2013), 712–740.CrossRefGoogle Scholar
Menkveld, A. “The Economics of High–Frequency Trading: Taking Stock.” Annual Review of Financial Economics, 8 (2016), 1–24.CrossRefGoogle Scholar
Menkveld, A., and Zoican, M.. “Need for Speed? Exchange Latency and Liquidity.” Review of Financial Studies, 30 (2017), 1188–1228.CrossRefGoogle Scholar
O’Hara, M. “High Frequency Market Microstructure.” Journal of Financial Economics, 116 (2015), 257–270.CrossRefGoogle Scholar
Rosu, I. “Fast and Slow Informed Trading.” Journal of Financial Markets, 43 (2019), 1–30.CrossRefGoogle Scholar
Tong, L. “A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors.” Working Paper, Fordham University (2015).Google Scholar
Securities, U.S. and Exchange Commission. “Concept Release on Equity Market Structure.” U.S. Securities and Exchange Commission Release No. 34-61358 (2010).Google Scholar
Weller, B. M. “Does Algorithmic Trading Deter Information Acquisition?” Review of Financial Studies, 31 (2018), 2184–2226.CrossRefGoogle Scholar
Yang, L., and Zhu, H.. “Back-Running: Seeking and Hiding Fundamental Information in Order Flows.” Review of Financial Studies, 33 (2020), 1484–1533.CrossRefGoogle Scholar
Yueshen, B. Z. “Uncertain Market Making.” Working Paper, INSEAD (2017).CrossRefGoogle Scholar
Supplementary material: PDF

Boehmer et al. supplementary material

Boehmer et al. supplementary material

Download Boehmer et al. supplementary material(PDF)
PDF 1.5 MB