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Algorithmic Trading and the Market for Liquidity

Published online by Cambridge University Press:  19 September 2013

Terrence Hendershott  and
Ryan Riordan
Terrence Hendershott
Affiliation:
[email protected], Haas School of Business, University of California at Berkeley, 545 Student Services Bldg #1900, Berkeley, CA 94720
Ryan Riordan
Affiliation:
[email protected], Faculty of Business and Information Technology, University of Ontario Institute of Technology, 2000 Simcoe St N, Oshawa, ONT L1H 7K4, Canada
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 4 , August 2013 , pp. 1001 - 1024
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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