Finance Cluster Seminar: Pradeep Yadav
We empirically investigate the reliability and the consistency with which algorithmic and human traders provide liquidity in electronic order-matching markets, and the consequent regulatory implications for the fragility in available liquidity in these markets. We find strong evidence that in turbulent periods, in contrast to manual traders, algorithmic public traders significantly reduce their participation and liquidity provision in trades; significantly reduce the extent to which they post new liquidity-supplying limit orders; and significantly reduce the aggressiveness of these limit orders, effectively increasing the price at which they are willing to supply liquidity. This greater withdrawal of algorithmic traders is directly associated with the disappearance of the speed-based information advantages of algorithmic traders amid the greater complexity of turbulent periods. We find that this has a significant propensity to generate feedback loops, and induce “contagion” through withdrawals in liquidity provision in related stocks, potentially making markets more “fragile”. Our results suggest that, in contrast to manual traders who adapt in (higher latency) real time, algorithmic trade execution appears less conducive to low impact adjustment of complex information asymmetries or flows. Overall, our results reinforce regulatory concerns about the potential for systemic fragility in this context.
Professor Yadav has earlier served as Visiting Professor at NYU Stern School and UCLA Anderson School, as Professor of Finance at Lancaster and Strathclyde Universities in the UK, and as CEO/Deputy CEO in public sector corporations and organizations. He has also served as Vice-President and as President of the European Finance Association; on the CAF Board of Advisors at the Indian School of Business; and as a Director on the Board of Directors of about twenty companies. Professor Yadav has also been extensively engaged for consulting assignments, and as an “expert” in several major legal cases in U.S. Courts.
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