Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market
Alain P. Chaboud,
Benjamin Chiquoine,
Erik Hjalmarsson and
Clara Vega
Journal of Finance, 2014, vol. 69, issue 5, 2045-2084
Abstract:
type="main">
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.
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (190)
Downloads: (external link)
http://hdl.handle.net/10.1111/jofi.12186 (text/html)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Rise of the machines: algorithmic trading in the foreign exchange market (2009) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:69:y:2014:i:5:p:2045-2084
Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp
Access Statistics for this article
More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().