Department of Finance
Department of Finance: Faculty Publications
Accessibility Remediation
If you are unable to use this item in its current form due to accessibility barriers, you may request remediation through our remediation request form.
Document Type
Article
Date of this Version
12-2021
Citation
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2659 - 2688 DOI: 10.1017/S0022109020000782
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 exchange co-location service that increases AT as an exogenous instrument to draw causal inferences of 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.
Comments
Used by permission.