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Premium Does Algorithmic Trading Improve Liquidity?
Author(s)
HENDERSHOTT TERRENCE,
JONES CHARLES M.,
MENKVELD ALBERT J.
Publication year2011
Publication title
the journal of finance
Resource typeJournals
PublisherBlackwell Publishing Inc
ABSTRACT 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.
Subject(s)adverse selection , algorithmic trading , biology , business , dark liquidity , economics , engineering , finance , financial economics , flash trading , futures contract , high frequency trading , horse , market liquidity , market maker , mechanical engineering , microeconomics , monetary economics , paleontology , price discovery , stock (firearms) , stock exchange , stock market
Language(s)English
SCImago Journal Rank18.151
H-Index299
eISSN1540-6261
pISSN0022-1082
DOI10.1111/j.1540-6261.2010.01624.x

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