Abstract
Prior studies on algorithmic trading (AT) have mostly focused on a single exchange. The authors use a public dataset provided by the Securities and Exchange Commission (SEC) covering all major U.S. exchanges to study the impact of AT and its fragmentation on market liquidity. Using a proxy of AT derived from trade to order volume ratio, they find that AT concentrated on a single exchange improves liquidity. However, AT fragmentation onto multiple exchanges is associated with deterioration in liquidity. Their findings suggest a market-making as well as predatory role of AT and have policy implications.
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