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Does algorithmic trading harm liquidity? Evidence from Brazil

Author

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  • Ramos, Henrique Pinto
  • Perlin, Marcelo Scherer

Abstract

This paper provides the first evidence of algorithmic trading (AT) reducing liquidity in the Brazilian equities market. Our results are contrary to the majority of work which finds a positive relationship between AT and liquidity. Using the adoption of a new data center for the B3 exchange as an exogenous shock, we report evidence that AT increased realized spreads in both firm fixed-effects and vector autoregression estimates for 26 stocks between 2017 and 2018 using high-frequency data. We also provide evidence that AT increases commonality in liquidity, evidencing correlated transactions between automated traders.

Suggested Citation

  • Ramos, Henrique Pinto & Perlin, Marcelo Scherer, 2020. "Does algorithmic trading harm liquidity? Evidence from Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301406
    DOI: 10.1016/j.najef.2020.101243
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    More about this item

    Keywords

    Liquidity; Algorithmic trading; Spreads; Commonality in liquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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