Wednesday, July 2, 2014
Michael J. Aitken, Angelo Aspris, Sean Foley, and Frederick H. deB. Harris have posted The Effects of Algorithmic Trading on Security Market Quality on SSRN with the following abstract:
We estimate in a systems framework the effect of algorithmic trading on security market quality, defined to include market manipulation at the close, information leakage prior to price-sensitive announcements, and effective spreads. Using cancellation proxies to identify AT, we show that greater AT can reduce market manipulation and information leakage as well as spreads. The data cover all securities on the London Stock Exchange and on NYSE-Euronext Paris four years before and after MiFID1. MiFID1 increased leakage and spreads with mixed effects on market manipulation. We address robustness to end-of-quarter reporting deadlines, analyze the over-identifying restrictions, and perform both Hausman and Stock-Yogo tests of the exogeneity and strength of our AT instruments.