Algorithmic trading in turbulent markets
Autor
Zhou, Hao
Kalev, Petko S.
Frino, Alex
Institución
Resumen
Does Algorithmic Trading (AT) exacerbate price swings in turbulent markets? We find that stocks
with high AT experience less price drops (surges) on days when the market declines (increases)
for more than 2%. This result is consistent with the view that AT minimizes price pressures and
mitigates transitory pricing errors. Further analyses show that the net imbalances of AT liquidity
demand and supply orders have smaller price impacts compared to non-AT net order imbalances
and algorithmic traders reduce their price pressure by executing their trades based on the prevailing volume-weighted average prices.