Does Algorithmic Trading Increase Volatility? Empirical Evidence from the Fully-Electronic Trading Platform Xetra

Abstract

Being equipped with a unique high-frequency dataset that enablesus to precisely identify algorithmic trading (i.e. computergenerated)activity, we provide strong evidence that algorithmictrading does not exceedingly increases volatility, at least not morethan human traders do. Our empirical analyses cover severalpotential reasons why algorithmic trading could increasevolatility. For example, we address whether or not algorithmictraders follow less diverse trading strategies than humans.Moreover, we investigate whether or not algorithmic traderswithdraw liquidity from the market during periods of highvolatility.