Stock Liquidity and Algorithmic Market Making During the COVID-19 Crisis

48 Pages Posted: 10 Jun 2021 Last revised: 24 Jan 2022

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Roberto Pascual

Universidad de las Islas Baleares

Date Written: December 14, 2021

Abstract

Much of the liquidity supply in modern markets comes from algorithmic traders (ATs). Prompted by concerns of fragility induced by such voluntary market making, we examine ATs’ liquidity-provision role during the COVID-19 crisis. We find that amidst the turmoil as market liquidity declined, ATs did not (disproportionately) withdraw liquidity supply. Stocks with the highest algorithmic trading (AT) experienced lower liquidity reduction compared to stocks with the lowest AT activity. High AT stocks did not experience greater reduction in either competition for liquidity provision or price improvements than low AT stocks. Multiple tests indicate that high AT did not associate with any greater deterioration in price efficiency vis-à-vis low AT stocks. Stocks in the industries hardest hit by COVID-19 did not see any less AT competition for liquidity supply or price efficiency than stocks in the least affected ones. Overall, our results allay some concerns that the current levels of AT make markets more susceptible to liquidity withdrawal in times of crises.

Keywords: COVID-19, algorithmic trading, liquidity, efficiency, competition

JEL Classification: G14

Suggested Citation

Chakrabarty, Bidisha and Pascual Gascó, Roberto, Stock Liquidity and Algorithmic Market Making During the COVID-19 Crisis (December 14, 2021). Journal of Banking and Finance, Forthcoming (https://doi.org/10.1016/j.jbankfin.2022.106415), Available at SSRN: https://ssrn.com/abstract=3857463 or http://dx.doi.org/10.2139/ssrn.3857463

Bidisha Chakrabarty (Contact Author)

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
149
Abstract Views
1,173
Rank
354,898
PlumX Metrics