Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market: Rise of the Machines

By A. Chaboud, Benjamin Chiquoine, Erik Hjalmarsson, Clara Vega. 2009

431 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/7e25a2cae4d46b2b4a60c306108db172fd20cd58

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Citations in the corpus

A Dynamic Limit Order Market with Fast and Slow Traders (2014, background): “Chaboud et al. (2013) study trading in three different FX pairs and find that in the two most liquid pairs (EUR/USD and JPY/USD) humans are more likely to consume liquidity from computers than vice versa.”
Does Algorithmic Trading Improve Liquidity (2011, background): “Chaboud et al. (2009) study AT in the foreign exchange market and focus on its relation to volatility, while Hendershott and Riordan (2009) measure the contributions of AT to price discovery on the Deutsche Boerse.”
The Flash Crash: The Impact of High Frequency Trading on an Electronic Market (2011, background): “Madhavan (2000), Biais, Glosten and Spatt (2002), and Amihud, Mendelson and Pedersen (2005) provide surveys of empirical market microstructure studies.”