Does algorithmic trading harm liquidity? Evidence from Brazil

Henrique Pinto Ramos and Marcelo Perlin

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: This paper provides the first evidence of algorithmic trading (AT) reducing liquidity in the Brazilian equities market. Our results are contrary to the majority of work which finds a positive relationship between AT and liquidity. Using the adoption of a new data center for the B3 exchange as an exogenous shock, we report evidence that AT increased realized spreads in both firm fixed-effects and vector autoregression estimates for 26 stocks between 2017 and 2018 using high-frequency data. We also provide evidence that AT increases commonality in liquidity, evidencing correlated transactions between automated traders.

Keywords: Liquidity; Algorithmic trading; Spreads; Commonality in liquidity (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301406

DOI: 10.1016/j.najef.2020.101243

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