The impact of algorithmic trading on liquidity in futures markets: new insights into the resiliency of spreads and depth

Alex Frino*, Dionigi Gerace, Masud Behnia

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the impact of algorithmic trading on the resiliency of bid-ask spreads and market depth. We use a natural experiment provided by the Australian Securities Exchange (ASX) for futures markets in 2012—the introduction of collocated facilities for FCM's. Previous research demonstrates that the change on the ASX in 2012 increased algorithmic trading and improved liquidity. We extend this study by documenting that the sensitivity of bid-ask spreads and market depth to price volatility and trading activity declines after the introduction of co-location. We also find that the speed of recovery of liquidity to large trades is more rapid after the introduction of colocated facilities. These results are consistent with the hypothesis that algorithmic trading reduces the time that limit orders are alive and the adjustment of quotes to new information and market volatility which in turn increases the resilience of liquidity.

Original languageEnglish
Pages (from-to)1301-1314
Number of pages14
JournalJournal of Futures Markets
Volume41
Issue number8
Early online date9 Jun 2021
DOIs
Publication statusPublished - Aug 2021

Keywords

  • futures markets
  • high-frequency trading
  • market efficiency
  • market microstructure

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