The effect of algorithmic trading on market liquidity

Evidence around earnings announcements on Borsa Italiana

Alex Frino, Vito Mollica, Eleonora Monaco, Riccardo Palumbo*

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper examines the impact of algorithmic trading (AT) on market liquidity around periods of high information asymmetry when available liquidity is more valuable. We identify the implementation of proximity hosting services by Borsa Italiana, that are expected to increase AT, in order to examine the behaviour of liquidity around earnings announcements in pre- and post-AT periods. Consistent with previous research, we find that bid-ask spreads widen and market depth falls following earnings announcements in the pre-AT period. However, in the post-AT period, while we find a similar pattern in bid-ask spreads, we find no evidence of a significant fall in market depth. We also find firms that experience the largest increase in AT from pre- to post-AT periods, exhibit lower bid-ask spreads and greater depth following earnings announcements. We conclude that AT improves market liquidity by increasing the resiliency of markets around periods of high information asymmetry, specifically around earnings announcements.

Original languageEnglish
Pages (from-to)82-90
Number of pages9
JournalPacific-Basin finance journal
Volume45
DOIs
Publication statusPublished - Oct 2017

Keywords

  • Algorithmic traders
  • Earnings announcements
  • Market liquidity

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