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Rise of the Machine...
Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market
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Chaboud, A. P. (author)
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Chiquoine, B. (author)
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- Hjalmarsson, Erik, 1975 (author)
- Gothenburg University,Göteborgs universitet,Institutionen för nationalekonomi med statistik,Centrum för finans,Department of Economics,Centre for Finance
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Vega, Clara (author)
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(creator_code:org_t)
- 2014-09-12
- 2014
- English.
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In: Journal of Finance. - : Wiley. - 0022-1082. ; 69:5, s. 2045-2084
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Abstract
Subject headings
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- We study the impact of algorithmic trading (AT) in the foreign exchange market using a long time series of high-frequency data that identify computer-generated trading activity. We find that AT causes an improvement in two measures of price efficiency: the frequency of triangular arbitrage opportunities and the autocorrelation of high-frequency returns. We show that the reduction in arbitrage opportunities is associated primarily with computers taking liquidity. This result is consistent with the view that AT improves informational efficiency by speeding up price discovery, but that it may also impose higher adverse selection costs on slower traders. In contrast, the reduction in the autocorrelation of returns owes more to the algorithmic provision of liquidity. We also find evidence consistent with the strategies of algorithmic traders being highly correlated. This correlation, however, does not appear to cause a degradation in market quality, at least not on average.
Subject headings
- SAMHÄLLSVETENSKAP -- Ekonomi och näringsliv (hsv//swe)
- SOCIAL SCIENCES -- Economics and Business (hsv//eng)
Keyword
- Algorithmic trading
- Price discovery
Publication and Content Type
- ref (subject category)
- art (subject category)
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