Does Algorithmic Trading Induce Herding?

Servanna Mianjun Fu, Christos Alexakis, Vasileios Pappas, Emmanouil Skarmeas and Thanos Verousis
Additional contact information
Christos Alexakis: Rennes SB - Rennes School of Business
Vasileios Pappas: Surrey Business School [Guildford] - UNIS - University of Surrey
Emmanouil Skarmeas: University of Piraeus

Post-Print from HAL

Abstract: Algorithmic trading (AT) plays a major role in the trading activities of developed markets. This research breaks new ground by investigating how AT influences herding behaviour in stock markets. Utilising the implementation of the Markets in Financial Instruments Directive (MiFID II), we show that AT‐induced herding is quantitatively 14 times more pronounced compared to herding triggered by non‐AT elements. Algorithmic traders herd more when international volatility and market uncertainty are high, revealing a heightened sensitivity to global market signals. However, during periods of high local volatility, AT seems to disregard these fluctuations, indicating an ‘inattention effect'. AT‐induced anti‐herding is prominent in the volatile aggressive stocks, while no such behaviour is observed in the more stable defensive stocks. The findings carry critical implications for both regulators and market professionals, as we uncover dual behaviours of AT‐induced herding and anti‐herding in varying market conditions.

Keywords: Algorithmic trading; Herding; Investor sentiment (search for similar items in EconPapers)
Date: 2024-11-27
References: Add references at CitEc
Citations:

Published in International Journal of Finance and Economics, 2024, 31 (1), pp.1186-1202. ⟨10.1002/ijfe.3085⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:hal:journl:hal-05467266

DOI: 10.1002/ijfe.3085

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().