Title: Contemporaneous and Dynamic Interactions between Price Discovery, Liquidity and Algorithmic Trading
Abstract: This paper studies the interactions between price discovery, liquidity and algorithmic trading for a large sample of Canadian companies cross-listed on the New York Stock Exchange for the period January 2004 to January 2011. Using daily measures of price discovery, we model the interactions between price discovery, relative trading volume, bid-ask spread, and algorithmic trading activity using a structural vector autoregression to account for lagged and contemporaneous relations among the variables. We observe that over time, the U.S. market is gaining dominance in terms of price discovery. Improvements in liquidity increase a market's contribution to price discovery, while at the same time, an increase in price discovery leads to better liquidity. We find that algorithmic trading activity is negatively related to price discovery, which we attribute to the crowding out effect as high-frequency traders compete aggressively with each other for arbitrage opportunity.
Publication Year: 2015
Publication Date: 2015-10-01
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot