Algorithmic trading engines versus human traders: Do they behave different in securities markets?
After exchanges and alternative trading venues have introduced electronic execution mechanisms worldwide, the focus of the securities trading industry shifted to the use of fully electronic trading engines by banks, brokers and their institutional customers. These Algorithmic Trading engines enable order submissions without human intervention based on quantitative models applying historical and real-time market data. Although there is a widespread discussion on the pros and cons of Algorithmic Trading and on its impact on market volatility and market quality, little is known on how algorithms actually place their orders in the market and whether and in which respect this differs form other order submissions. Based on a dataset that for the first time includes a specific flag to enable the identification of orders submitted by Algorithmic Trading engines, the paper investigates the extent of Algorithmic Trading activity and specifically their order placement strategies in comparison to human traders in the Xetra trading system. It is shown that Algorithmic Trading has become a relevant part of overall market activity and that Algorithmic Trading engines fundamentally differ from human traders in their order submission, modification and deletion behavior as they exploit real-time market data and latest market movements.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus K Brunnermeier & Lasse Heje Pederson, 2003.
FMG Discussion Papers
dp441, Financial Markets Group.
- Lasse H. Pedersen & Markus Brunnermeier, 2004. "Predatory Trading," Econometric Society 2004 North American Winter Meetings 425, Econometric Society.
- Markus K. Brunnermeier & Lasse Heje Pederson, 2003. "Predatory trading," LSE Research Online Documents on Economics 24829, London School of Economics and Political Science, LSE Library.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2004. "Predatory Trading," NBER Working Papers 10755, National Bureau of Economic Research, Inc.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2004. "Predatory Trading," CEPR Discussion Papers 4639, C.E.P.R. Discussion Papers.
- Johannes Prix & Otto Loistl & Michael Huetl, 2007. "Algorithmic Trading Patterns in Xetra Orders," The European Journal of Finance, Taylor & Francis Journals, vol. 13(8), pages 717-739.
- Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January.
When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:200910. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.