Publication Type
Journal Article
Version
submittedVersion
Publication Date
10-2020
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.
Keywords
Algorithmic trading, market quality, high frequency trading, buy-side institution, execution costs
Discipline
Corporate Finance | Finance and Financial Management
Research Areas
Finance
Publication
Journal of Financial and Quantitative Analysis
Volume
56
Issue
8
First Page
2659
Last Page
2688
ISSN
0022-1090
Identifier
10.1017/S0022109020000782
Publisher
Cambridge University Press
Embargo Period
4-15-2021
Citation
BOEHMER, Ekkehart; FONG, Kingsley; and WU, Juan Julie.
Algorithmic trading and market quality: International evidence. (2020). Journal of Financial and Quantitative Analysis. 56, (8), 2659-2688.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6685
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1017/S0022109020000782