Low Latency Trading and Comovement of Order Flow and Prices

We examine the impact of algorithmic trading (AT) in equities on the comovement of order flow, returns, liquidity, and volatility to assess how AT affects the market’s susceptibility to systemic shocks. Using order-level data around a natural experiment at the National Stock Exchange of India, which in 2010 has introduced features that promote HFT, we find that more intense AT reduces commonality in order flow, returns, liquidity, and volatility, and therefore reduce the market’s susceptibility to systemic shocks. These declines are more pronounced for algorithmic order flow and for large-cap firms. We attribute our findings to more intense competition among algorithmic than non-algorithmic traders.