28 May 2010

Algorithmic Trading

Kids Prefer Cheese | Mike Munger | Machine Trading Good?

At a minimum, not bad.

The problem is that many people think stuff they don't understand must be bad. Of course, they still watch their plasma tv. Somehow, not understanding THAT must be okay.
Does Algorithmic Trading Improve Liquidity?

Terrence Hendershott, Charles Jones & Albert Menkveld
Journal of Finance, forthcoming

Abstract: Algorithmic trading has sharply increased over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The NYSE automated quote dissemination in 2003, and we use this change in market structure that increases algorithmic trading as an exogenous instrument to measure the causal effect of algorithmic trading on liquidity. For large stocks in particular, algorithmic trading narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that algorithmic trading improves liquidity and enhances the informativeness of quotes
Now maybe this is just some kind of Helsinki syndrome reaction from the trauma of Professor Chen's algorithmic analysis class, but you take anything I'm cool with already and add the adjective "algorithmic" to it, and I'm totally on-board.

Algorithmic art?  Yes, please.  Algorithmic trading?  Sure thing.  Algorithmic whisky distilling?  Sadly, that doesn't appear to exist yet, but I think that just makes it my responsibility to correct this tragedy.  Somebody get me a big copper pot, several bushels of grains, and a Ruby interpreter.

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