Algorithmic Trading and Market Quality: International Evidence

Authors

Ekkehart Boehmer, Singapore Management University
Kingsley Fong, University of New South Wales Business School
Juan (Julie) Wu, University of Nebraska-LincolnFollow

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

Comments

Used by permission.

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.