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Does Algorithmic Trading Improve Liquidity?

The Journal of finance (New York), 2011-02, Vol.66 (1), p.1-33 [Peer Reviewed Journal]

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Title:
Does Algorithmic Trading Improve Liquidity?
Author: HENDERSHOTT, TERRENCE ; JONES, CHARLES M. ; MENKVELD, ALBERT J.
Subjects: Adverse selection ; Algorithms ; Asset pricing ; Causality ; Certificates of deposit ; Credit market ; Derivatives ; Financial engineering ; Limit orders ; Liquidity ; Market structure ; Mathematical finance ; Standard deviation ; Stock exchange ; Stock exchanges ; Stock shares ; Stocks ; Studies ; Time series ; Trade ; Trade volume
Is Part Of: The Journal of finance (New York), 2011-02, Vol.66 (1), p.1-33
Description: Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.
Publisher: Malden, USA: Blackwell Publishing Inc
Language: English
Identifier: ISSN: 0022-1082
EISSN: 1540-6261
DOI: 10.1111/j.1540-6261.2010.01624.x
CODEN: JLFIAN
Source: Alma/SFX Local Collection

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