Does Algorithmic Trading Reduce Information Acquisition?

Thursday, December 7, 2017
Brian M. Weller

Abstract

I demonstrate an important tension between acquiring information and incorporating it into asset prices. As a salient case, I analyze algorithmic trading (AT), which is typically associated with improved price efficiency. Using a new measure of the information content of prices and a comprehensive panel of 54,879 stock-quarters of Securities and Exchange Commission (SEC) market data, I establish instead that the amount of information in prices decreases by 9% to 13% per standard deviation of AT activity and up to a month before scheduled disclosures. AT thus may reduce price informativeness despite its importance for translating available information into prices.

Citation: 

Brian M. Weller; Does Algorithmic Trading Reduce Information Acquisition?, The Review of Financial Studies, hhx137, https://doi.org/10.1093/rfs/hhx137