Does Algorithmic Trading Increase Volatility? Empirical Evidence from the Fully-Electronic Trading Platform Xetra

Being equipped with a unique high-frequency dataset that enables us to precisely identify algorithmic trading (i.e. computergenerated) activity, we provide strong evidence that algorithmic trading does not exceedingly increases volatility, at least not more than human traders do. Our empirical analyses cover several potential reasons why algorithmic trading could increase volatility. For example, we address whether or not algorithmic traders follow less diverse trading strategies than humans. Moreover, we investigate whether or not algorithmic traders withdraw liquidity from the market during periods of high volatility.

[1]  Arnold Picot,et al.  The Automation of Capital Markets , 2006, J. Comput. Mediat. Commun..

[2]  Francis X. Diebold,et al.  Modeling and Forecasting Realized Volatility , 2001 .

[3]  Peter Gomber,et al.  Agentenbasierter Rentenhandel , 1999, Wirtsch..

[4]  J. Ord,et al.  An Investigation of Transactions Data for NYSE Stocks , 1985 .

[5]  Sven S. Groth Algorithmic Trading Engines and Liquidity Contribution: The Blurring of "Traditional" Definitions , 2009, I3E.

[6]  Robert Kissell,et al.  Algorithmic Decision-Making Framework , 2005, Algorithmic Trading Methods.

[7]  Christof Weinhardt,et al.  Elektronisierung des außerbörslichen Wertpapierhandels — Konzeption und Engineering eines finanzwirtschaftlich und mikroökonomisch basierten Multi-Agenten-Ansatzes , 1999, Wirtschaftsinf..

[8]  Markus Gsell,et al.  Assessing the Impact of Algorithmic Trading on Markets: A Simulation Approach , 2008, ECIS.

[9]  Ryan Riordan,et al.  Algorithmic Trading and Information , 2009 .

[10]  Kalok Chan,et al.  Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong , 2001 .

[11]  Jian Yang,et al.  Algorithm Selection: A Quantitative Approach , 2006 .

[12]  Charles M. Jones,et al.  Does Algorithmic Trading Improve Liquidity? , 2010 .

[13]  Markus Gsell,et al.  Algorithmic trading engines versus human traders - Do they behave different in securities markets? , 2009, ECIS.

[14]  Clara Vega,et al.  Rise of the Machines : Algorithmic Trading in the Foreign Exchange Market , 2009 .

[15]  Ian Domowitz,et al.  The Cost of Algorithmic Trading , 2005 .

[16]  R. Gencay,et al.  An Introduc-tion to High-Frequency Finance , 2001 .

[17]  Robert A. Schwartz,et al.  Market Sidedness: Insights into Motives for Trade Initiation , 2007 .