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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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    Cited by:

    1. repec:eee:jbfina:v:99:y:2019:i:c:p:157-181 is not listed on IDEAS
    2. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "High frequency trading and end-of-day price dislocation," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 330-349.
    3. Daniel Martin Katz & Michael J Bommarito II & Tyler Soellinger & James Ming Chen, 2015. "Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making," Papers 1508.05751, arXiv.org, revised May 2017.
    4. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Detecting informed activities in European-style option tradings," Papers 1403.3294, arXiv.org.
    5. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.
    6. repec:eee:jocoma:v:5:y:2017:i:c:p:36-49 is not listed on IDEAS
    7. repec:cup:jfinqa:v:54:y:2019:i:01:p:449-479_00 is not listed on IDEAS
    8. Mila Getmansky & Ravi Jagannathan & Loriana Pelizzon & Ernst Schaumburg & Darya Yuferova, 2017. "Stock Price Crashes: Role of Slow-Moving Capital," NBER Working Papers 24098, National Bureau of Economic Research, Inc.
    9. Keiichi Goshima & Yusuke Kumano, 2018. "Monetary Policy Announcement and Algorithmic News Trading in the Foreign Exchange Market," IMES Discussion Paper Series 18-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    10. Rosa, Carlo, 2016. "Walking on thin ice: Market quality around FOMC announcements," Economics Letters, Elsevier, vol. 138(C), pages 5-8.
    11. George Jiang & Ingrid Lo & Giorgio Valente, 2014. "High-Frequency Trading around Macroeconomic News Announcements: Evidence from the U.S. Treasury Market," Staff Working Papers 14-56, Bank of Canada.
    12. Frijns, Bart & Indriawan, Ivan & Tourani-Rad, Alireza, 2015. "Macroeconomic news announcements and price discovery: Evidence from Canadian–U.S. cross-listed firms," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 35-48.
    13. repec:eee:pacfin:v:45:y:2017:i:c:p:91-102 is not listed on IDEAS
    14. Fernandez-Perez, Adrian & Frijns, Bart & Tourani-Rad, Alireza, 2017. "When no news is good news – The decrease in investor fear after the FOMC announcement," Journal of Empirical Finance, Elsevier, vol. 41(C), pages 187-199.
    15. repec:eee:eneeco:v:72:y:2018:i:c:p:356-364 is not listed on IDEAS
    16. Kaplanski, Guy & Levy, Haim, 2015. "Trading breaks and asymmetric information: The option markets," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 390-404.
    17. Kurov, Alexander & Sancetta, Alessio & Strasser, Georg & Wolfe, Marketa Halova, 2019. "Price Drift Before U.S. Macroeconomic News: Private Information about Public Announcements?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(1), pages 449-479, February.
    18. repec:eee:ecofin:v:42:y:2017:i:c:p:172-192 is not listed on IDEAS
    19. Bertone, Stephen & Paeglis, Imants & Ravi, Rahul, 2015. "(How) has the market become more efficient?," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 72-86.
    20. repec:eee:jbfina:v:86:y:2018:i:c:p:127-142 is not listed on IDEAS
    21. repec:eee:phsmap:v:517:y:2019:i:c:p:73-85 is not listed on IDEAS
    22. Hautsch, Nikolaus & Noé, Michael & Zhang, S. Sarah, 2017. "The ambivalent role of high-frequency trading in turbulent market periods," CFS Working Paper Series 580, Center for Financial Studies (CFS).
    23. repec:eee:mulfin:v:50:y:2019:i:c:p:13-28 is not listed on IDEAS

    More about this item

    Keywords

    Macroeconomic News; High Frequency Trading; Latency Costs; Market Activity; Event-Based Trading;

    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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