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Speed, Algorithmic Trading, and Market Quality around Macroeconomic News Announcements

Author

Listed:
  • Martin L. Scholtus

    (Erasmus University Rotterdam)

  • Dick van Dijk

    (Erasmus University Rotterdam)

  • Bart Frijns

    (Auckland University of Technology)

Abstract

This discussion paper resulted in a publication in the 'Journal of Banking and Finance', 2014, 38, 89-105. This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook).

Suggested Citation

  • Martin L. Scholtus & Dick van Dijk & Bart Frijns, 2012. "Speed, Algorithmic Trading, and Market Quality around Macroeconomic News Announcements," Tinbergen Institute Discussion Papers 12-121/III, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20120121
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    References listed on IDEAS

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    More about this item

    Keywords

    Macroeconomic News; High Frequency Trading; Latency Costs; Market Activity; Event-Based Trading;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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