Department of Finance


Date of this Version



Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2659 - 2688 DOI: 10.1017/S0022109020000782


Used by permission.


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.