The role of algorithmic trading in stock liquidity and commonality in electronic limit order markets

Hiroshi Moriyasu; Marvin Wee; Jing Yu

doi:10.1016/j.pacfin.2018.04.004

The role of algorithmic trading in stock liquidity and commonality in electronic limit order markets

Hiroshi Moriyasu, Marvin Wee^*, Jing Yu

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

9 Citations (Scopus)

Abstract

Using the adoption of the Arrowhead trading platform in January 2010 as an exogenous event, we investigate the effects of algorithmic trading on stock market liquidity and commonality in liquidity under different market conditions on the Tokyo Stock Exchange. After controlling for endogeneity, we find algorithmic trading increases stock liquidity by narrowing spreads and increasing market depth. Furthermore, algorithmic trading increases commonality in liquidity at both high and low frequency. These findings appear to arise due to the reduction in monitoring costs. Further analysis reveals that, following large market declines, the effect of algorithmic trading on spreads and market depth weakens while the effect on commonality in stock liquidity intensifies.

Original language	English
Pages (from-to)	103-128
Number of pages	26
Journal	Pacific Basin Finance Journal
Volume	49
DOIs	https://doi.org/10.1016/j.pacfin.2018.04.004
Publication status	Published - Jun 2018

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title = "The role of algorithmic trading in stock liquidity and commonality in electronic limit order markets",

abstract = "Using the adoption of the Arrowhead trading platform in January 2010 as an exogenous event, we investigate the effects of algorithmic trading on stock market liquidity and commonality in liquidity under different market conditions on the Tokyo Stock Exchange. After controlling for endogeneity, we find algorithmic trading increases stock liquidity by narrowing spreads and increasing market depth. Furthermore, algorithmic trading increases commonality in liquidity at both high and low frequency. These findings appear to arise due to the reduction in monitoring costs. Further analysis reveals that, following large market declines, the effect of algorithmic trading on spreads and market depth weakens while the effect on commonality in stock liquidity intensifies.",

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author = "Hiroshi Moriyasu and Marvin Wee and Jing Yu",

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AU - Moriyasu, Hiroshi

AU - Wee, Marvin

AU - Yu, Jing

PY - 2018/6

Y1 - 2018/6

N2 - Using the adoption of the Arrowhead trading platform in January 2010 as an exogenous event, we investigate the effects of algorithmic trading on stock market liquidity and commonality in liquidity under different market conditions on the Tokyo Stock Exchange. After controlling for endogeneity, we find algorithmic trading increases stock liquidity by narrowing spreads and increasing market depth. Furthermore, algorithmic trading increases commonality in liquidity at both high and low frequency. These findings appear to arise due to the reduction in monitoring costs. Further analysis reveals that, following large market declines, the effect of algorithmic trading on spreads and market depth weakens while the effect on commonality in stock liquidity intensifies.

AB - Using the adoption of the Arrowhead trading platform in January 2010 as an exogenous event, we investigate the effects of algorithmic trading on stock market liquidity and commonality in liquidity under different market conditions on the Tokyo Stock Exchange. After controlling for endogeneity, we find algorithmic trading increases stock liquidity by narrowing spreads and increasing market depth. Furthermore, algorithmic trading increases commonality in liquidity at both high and low frequency. These findings appear to arise due to the reduction in monitoring costs. Further analysis reveals that, following large market declines, the effect of algorithmic trading on spreads and market depth weakens while the effect on commonality in stock liquidity intensifies.

KW - Algorithmic trading

KW - Commonality in liquidity

KW - Liquidity

KW - Market decline

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SP - 103

EP - 128

JO - Pacific Basin Finance Journal

JF - Pacific Basin Finance Journal

ER -

The role of algorithmic trading in stock liquidity and commonality in electronic limit order markets

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