Skip to main content
×
Home
    • Aa
    • Aa

Algorithmic Trading and the Market for Liquidity

  • Terrence Hendershott (a1) and Ryan Riordan (a2)
Abstract
Abstract

We examine the role of algorithmic traders (ATs) in liquidity supply and demand in the 30 Deutscher Aktien Index stocks on the Deutsche Boerse in Jan. 2008. ATs represent 52% of market order volume and 64% of nonmarketable limit order volume. ATs more actively monitor market liquidity than human traders. ATs consume liquidity when it is cheap (i.e., when the bid-ask quotes are narrow) and supply liquidity when it is expensive. When spreads are narrow ATs are less likely to submit new orders, less likely to cancel their orders, and more likely to initiate trades. ATs react more quickly to events and even more so when spreads are wide.

Copyright
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

D. Bertsimas , and A. Lo . “Optimal Control of Execution Costs.” Journal of Financial Markets, 1 (1998), 150.

H Bessembinder . “Issues in Assessing Trade Execution Costs.” Journal of Financial Markets, 6 (2003), 233257.

B. Biais ; P. Hillion ; and C. Spatt . “An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse.” Journal of Finance, 50 (1995), 16551690.

I. Domowitz , and H. Yegerman . “The Cost of Algorithmic Trading: A First Look at Comparative Performance.” Journal of Trading, 1 (2006), 3342.

D Duffie . “Asset Price Dynamics with Slow-Moving Capital.” Journal of Finance, 65 (2010), 12381268.

T. Foucault , and A. Menkveld . “Competition for Order Flow and Smart Order Routing Systems.” Journal of Finance, 63 (2008), 119158.

T. Foucault ; A. Roëll ; and P. Sandas . “Market Making with Costly Monitoring: An Analysis of the SOES Controversy.” Review of Financial Studies, 16 (2003), 345384.

R. Goettler ; C. Parlour ; and U. Rajan . “Informed Traders and Limit Order Markets.” Journal of Financial Economics, 93 (2009), 6787.

L Harris . “Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems.”Financial Markets, Institutions, and Instruments, 7 (1998), 176.

J. Hasbrouck , and G. Saar . “Low-Latency Trading.” Journal of Financial Markets, 16 (2013), 646679.

H Hau . “Location Matters: An Examination of Trading Profits.” Journal of Finance, 56 (2001), 19591983.

T. Hendershott ; C. M. Jones ; and A. J. Menkveld . “Does Algorithmic Trading Improve Liquidity?Journal of Finance, 66 (2011), 133.

I. Kawaller ; P. Koch ; and T. Koch . “The Temporal Price Relationship between S&P 500 Futures and the S&P 500 Index.” Journal of Finance, 42 (1987), 13091329.

C. Lee , and M. Ready . “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733746.

A. Lo ; A. MacKinlay ; and J. Zhang . “Econometric Models of Limit-Order Executions.” Journal of Financial Economics, 65 (2002), 3171.

A Menkveld . “High Frequency Trading and the New Market Makers.” Journal of Financial Markets, 16 (2013), 712740.

M Petersen . “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.”Review of Financial Studies, 22 (2009), 435480.

A Ranaldo . “Order Aggressiveness in Limit Order Book Markets.” Journal of Financial Markets, 7 (2004), 5374.

I Rosu . “A Dynamic Model of the Limit Order Book.” Review of Financial Studies, 22 (2009), 46014641.

S Thompson . “Simple Formulas for Standard Errors That Cluster by Both Firm and Time.” Journal of Financial Economics, 99 (2011), 110.

K Venkataraman . “Automated versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges.” Journal of Finance, 56 (2001), 14451485.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 147 *
Loading metrics...

Abstract views

Total abstract views: 1091 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 22nd June 2017. This data will be updated every 24 hours.