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

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1017/S0022109020000782

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