The Effects of Algorithmic Trading on Security Market Quality

Abstract

We estimate in a systems framework the effect of algorithmic trading (AT) 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 Markets in Financial Instruments Directive 1 (MiFID1).