212 (FINAL) 財務金融學刊

Journal of Financial Studies Vol. 28 No.
2 June 2020 49
The Effect of Algorithmic Trading on Intraday

Price Efficiency: Evidence from the Foreign
Exchange Market
Zhen-Xing Wu *
School of Finance, Zhongnan University of Economics and Law
Zhen-Wei Hong**
Department of Corporate Banking, CTBC Bank
Yin-Feng Gau ***

Department of Finance, National Central University
Abstract *
This paper studies the impact of algorithmic trading (AT) on informational efficiency in
the foreign exchange market on an intraday basis. Following Hasbrouck (1993), we measure
hourly and ten-minute pricing efficiency by using prices and order flows, and show that, in FX
markets, AT exhibits a reverse intraday pattern with trading size. The results suggest that
greater AT activity is related to lower market efficiency, implying that algorithmic traders
strategically enter the market when informational efficiency is lower. However, AT is
associated with an increase in market efficiency in subsequent intraday periods in EUR/USD
and USD/JPY markets.
Key words: Algorithmic trading, price efficiency, pricing error, foreign exchange markets, vector
autocorrelation (VAR)
* Corresponding author: Zhen-Xing Wu, E-mail: loveaf1225@gmail.com, Lecturer of School of Finance,

Zhongnan University of Economics and Law, No. 182, Nanhu Ave., East Lake High-Tech Development
Zone, Wuhan 430073, China.
** Zhen-Wei Hong, Junior Manager of Department of Corporate Banking, CTBC Bank, Taichung,
Taiwan.
*** Yin-Feng Gau, Professor of Department of Finance, National Central University, Taoyuan, Taiwan.
The authors thank the EBS Ltd. for providing the EBS data. We thank Yehning Chen (the Editor) and
two anonymous referees for many helpful comments. We are also grateful for comments by Yulun
Chen; Hung-Neng Lai; Carl Shen; and Jin-Huei Yeh; as well as seminar/conference participants at
Chung Yuan Christian University, Dong-Hua University, and Taiwan Finance Association. Yin-Feng
Gau thanks the Ministry of Science and Technology for financial support (MOST104-2410-H-008-
014-MY3).
(The manuscript was awarded the JFS Research Paper Award at the 2018 International Conference of
Taiwan Finance Association.)
* (Received: October 1, 2018; First Revision: February 15, 2019; Second Revision: September 11, 2019;
Accepted: February 17, 2020)
DOI: 10.6545/JFS.202006_28(2).0002
50 Journal of Financial Studies Vol. 28 No. 2 June 2020
I. Introduction
The trading structure in foreign exchange (FX) markets is evolving rapidly to
respond to new electronic trading technologies. As addressed in King, Osler, and
Rime (2013), the increasing transparency, reduced trading costs, and rapid
transaction speed emerge as new traders enter the market and existing traders
have modified their behavior. The dramatic changes in the FX market structure
have significant effects on exchange rate dynamics. In this paper, we focus on
the intraday impact of algorithmic trading (AT) activities on informational price
efficiency in the trading platform of the Electronic Broking Services (EBS).
AT refers to the algorithmic trading activities that traders submit or cancel
orders, whereas high-frequency trading (HFT) reacts within milliseconds to
market updates or new information. Trading in computer-monitoring markets
with rapid trading speed at high frequency has become common in major
financial markets in recent years, beginning in the U.S. equity market in the
1990s. As addressed in Boehmer, Fong, and Wu (2015), AT is not a recent
phenomenon, but its intensity, volume, and especially the speed at which it is
conducted has been growing dramatically over the past decade. The availability
of an efficient platform for implementing AT strategies is a precondition for
HFT.
HFT can be viewed as the subset of AT that can undertake in response to
changes in information flow and market conditions within milliseconds, as not
all algorithmic traders trade at extremely high frequency. In other words,
high-frequency traders refer to algorithmic traders with access to fast trading
technology.
Understanding the effects of AT on other market participants, trading
strategies, and the market quality is an important issue. There is a debate about
whether and how AT or HFT should be regulated. While some have highlighted
the potential for more efficient price discovery, others are concerned about the
higher adverse selection cost and increased volatility caused by AT.
Several theoretical and empirical models analyze the effects of AT on market
quality variables, including transaction costs, volatility, and informational
efficiency. To the best of our knowledge, the earliest literature focuses on how
AT impacts on market liquidity and most of the literature provide evidence that
AT increases the market liquidity (see Hendershott, Jones, and Menkveld (2011),
Carrion (2013), Hasbrouck and Saar (2013), and Hendershott and Riordan
(2013)). In the same line, Brogaard, Hendershott, and Riordan (2014) study the
impact of HFT on price discovery and find that high-frequency traders facilitate
price efficiency by trading in the direction of permanent price changes during
times of macroeconomic news announcement. Impacts of high-frequency
Journal of Financial Studies Vol. 28 No. 2 June 2020 51
traders’ liquidity demanding orders and liquidity supplying orders are different.
Brogaard, Hendershott, and Riordan (2014) also discover that HFT relates to
macroeconomic news announcements, market-wide asset price changes, and
order book imbalances.
Nevertheless, based on a different dataset and models, Kirilenko et al. (2017)
present that HFT increases market volatility and bid-ask spread. Moreover,
theoretical models have shown that HFT induces decreasing market liquidity
and increasing short-term price volatility, and results in adverse-selection costs
for slow traders during market stress periods (see Biais, Foucault and Moinas
(2015), Jarrow and Protter (2012), and Aït-Sahalia and Saglam (2013)).
Boehmer, Fong, and Wu (2015) provide a survey of theoretical models and
empirical results on the study of AT in equity markets. They conclude that, in the
literature, studies of AT reveal an interesting dichotomy between theories and
empirical results. Theoretical models mostly predict negative (or mixed)
consequences of having fast traders in the market, whereas the average effects
estimated in empirical results tend to be positive (Boehmer, Fong and Wu
(2015)).
Using intraday data on security-level quotes and trades in 42 markets around
the world, Boehmer, Fong, and Wu (2015) study the impact of AT intensity on
equity market liquidity, short-term volatility, and informational efficiency
between 2001 and 2011. Overall, their results show that AT is beneficial as it
improves liquidity and informational efficiency, whereas it increases volatility.
The beneficial effect of AT is smaller for low-priced or high-volatility stocks or
when market making is difficult, e.g., in the event of “Flash Crash” of 2011. The
main costs associated with AT appear to be increased volatility.
Although the role of AT (or HFT) in the stock market has been often
discussed in previous research, the impact of AT on the trading quality and price
efficiency in the FX market is less studied. In the recent development of FX
electronic trading, electronic limit-order markets have largely replaced voice
brokers in the trading of liquid currencies. The popularity of electronic trading
in FX markets has made it possible for order-submission strategies to be
algorithmically programmed and executed by computers (King, Osler, and Rime
2013) and Chaboud et al. (2014)). With AT, agents design the program-trading
but thereafter monitor its performance and adjust trading strategies as
necessary. The use of AT allows traders to use fast execution speeds to exploit
any discrepancy in prices or quotes. As King, Osler, and Rime (2013) note, in the
FX market, high-frequency traders concentrate on the spot FX market for the
most liquid currency pairs where they can trade with smaller execution cost and
little price impact. EBS is the most widely used trading platform among banks.
Moore, Schrimpf, and Sushko (2016) present that the share of AT increases from
just 2% in 2004 to around 50% in 2010 in the EBS.
Chaboud et al. (2014) use the EBS data to study the impact of AT in the FX
market. As their data can allow them to identify computer-generated trading
activities, they refer the computer-generated trading to be AT. Overall, Chaboud
et al. (2014) find that AT results in an improvement in two measures of price
efficiency: the frequency of triangular arbitrage opportunities and the
autocorrelation of high-frequency returns. Their results are consistent with the
view that AT improves informational efficiency by speeding up price discovery,
but that it may also impose higher adverse selection costs on slower traders.
They also find evidence consistent with the strategies of algorithmic traders
being highly correlated.
Our paper contributes to the related research in four aspects. First, our study
with the sample period of 2009-2014 can provide an extensive analysis to
complement Chaboud et al. (2014) whose sample period is from 2003 through
2007. After 2008, more interdealers adopt AT and this may cause a structural
change in the FX trading. Baron et al. (2019) and Brogaard and Garriott (2019)
indicate a crowding out effect between new HFT entrants and original
high-frequency traders. The competition between original high-frequency
traders and the new HFT entrants would lead to lower profitability for HFT and
make some high-frequency traders exit. Moreover, the occurrence of the
2008-2009 subprime crisis would also affect traders’ trading strategies and the
management of investment risk. This provides us with an opportunity to
examine how the financial crisis affects the relation between AT and price
efficiency. Therefore, our study based on the 2009-2014 period can provide a
complementary study for Chaboud et al. (2014).
Second, different from Chaboud et al. (2014), we take the order flow-based
approach to measure the informational efficiency of prices in FX markets. Order
flow is different from the trading volume. Trading volume is the amount of a
trade, whereas order flow reveals the direction of transaction. Order flow is
defined as the difference between buyer initiated and seller initiated orders,
measured in base currency.1 When mapping information to prices, order flow is
important in the information transmission mechanism. Therefore, we measure
the market efficiency by identifying how prices adjust in response to order flow
and consider the price impact of trades to study the extent to which prices
respond to information implicit in order flow.
Third, different from Chaboud et al. (2014) and Brogaard, Hendershott, and
Riordan (2014), we pay more attention to the intraday effect of AT on price
efficiency. The market structure varies across 24 hours in the FX market,
including trading cost, trading volume, price volatility, and price efficiency (see
1 Thus, a positive value of order flow indicates a net excess of buyer initiated trades. Similarly, a
negative value of order flow indicates a net excess of seller initiated trades which means a transaction
quote offering to buy, say, yens, for dollars.
Ito and Hashimoto (2006), Piccotti (2016), and Gau and Wu (2017)). We expect
that the intraday effects are important for understanding the influence of AT on
the trades for exchange rates.
Finally, we study whether AT activities affect FX market’s incorporation of
information into currency prices by using a structural vector autoregressive
(SVAR) model. The use of SVAR model allows us to investigate the dynamic
impact of AT on price discovery and characterize the joint dynamics of trading
activities and pricing efficiency.2 The results show that AT exhibits a strong
reverse pattern with trading volume, and that greater AT activity is related to
lower pricing efficiency, implying that algorithmic traders strategically enter the
market when informational efficiency is lower. Nevertheless, AT is associated
with an increase in market efficiency in subsequent intraday periods. Our results
reveal that AT may help enhance price discovery afterwards, suggesting some
algorithmic traders may be informed in the FX market.
The remainder of this paper is organized as follows. Section II discusses the
FX trading data and explains the proxies we use to measure AT activity and price
efficiency. Section III demonstrates the structural vector autoregression (SVAR)
model. Empirical results are reported and discussed in Section IV. Section V
concludes.
II. Data
A. EBS Data of FX Trading

By early 2000s, electronic trading is dramatically increasing and two
electronic platforms, Electronic Broking Services (EBS) and Reuters, process a
majority of global interdealer spot trading in the major currency pairs. An
overview of Ito and Hashimoto (2006) suggests that dealers’ trading instincts
have been replaced with computer-aided models. Moreover, BIS (2013)
documents that over 70% trading in the FX market is through algorithmic
trading.
Trades in each major currency pair are highly concentrated on one platform.
For example, of the top two most traded currency pairs, EUR/USD and
2 As pointed in Biais and Foucault (2014), establishing causal links between high-frequency trading and
market quality suffers the problem of endogeneity. HFT and market quality are likely determined by
common factors (e.g., the precision of public news), some of which are difficult to control for or
cannot be observed empirically. Moreover, market quality variables and AT strategies are jointly
endogenous, as both directly reflect market participants’ optimization decisions, their reaction to
market conditions, and their response to the strategies of others. One way to overcome these
endogeneity problems is to use instrument variables. The other approach is to use a multivariate
model that incorporates all endogenous variables. Following Brogaard (2010), we use a vector
autoregressive model for AT and PE to deal with the problem of engdogeneity in the joint dynamics of
AT and PE.
USD/JPY, are traded primarily on EBS. Hence, we use the EBS data in our
analysis of AT effects in the spot trading of EUR/USD and USD/JPY. Another
advantage of using the EBS data is that, different from a number of equity
trading venues, traders do not get rebates for providing liquidity on EBS, which
allows for a clear study of the role of AT making and taking in price efficiency.
The data we use are the intraday spot exchange rates provided by the EBS.
The EBS data include tick-by-tick bid and ask quotes, lowest given and highest
paid transaction prices, and the trade size of each transaction. In our analysis,
observations between Friday 23:00 and Sunday 23:00 GMT are excluded, since
only minimal trading activity is observed during these nonstandard hours on
weekends.
As noted in Ito and Hashimoto (2006), the EBS data set has advantages over
the frequently-used, indicative quotes of a FX market tick-by-tick data set, such
as FXFX of Reuters, in two ways. First, the EBS recorded “firm” quotes at which
banks that post quotes are committed to trade, when they are “hit.” On the other
hand, the indicative quotes of FXFX screen are just those input by dealers for
information only, without any commitment for trade. Indicative quotes are
much less reliable than firm quotes in analyzing the trading activities of spot
exchange rates. Second, transactions data available in the EBS dataset are simply
not available in the FXFX screen.
The FX market is a two-tier market. The FX trades can be divided into
interdealer (or interbank) and customer trades. Trading is either direct or
brokered in the interdealer market. According to BIS (2013), electronic trading
prevails and accounts for a markedly large share in the global foreign exchange
trading. Two most important global electronic broking systems are the
Electronic Broking Service (EBS) and Reuters D3000. The presence of electronic
brokers in the interdealer market has significantly changed the mechanism of
the foreign exchange spot trading. The electronic brokers collect orders from
screens connected together in a network worldwide and match the orders. The
dealers can see the pre-trade information including the best bid price, the best
ask price, the dealing price, and sign of all trades. Therefore, the introduction of
electron broker induces a more centralized and transparent marketplace for FX.
We use the FX trading data provided by EBS, which consist of quote prices,
transaction prices, trading volumes, and trade directions for USD/JPY and
EUR/USD, covering the period from January 1, 2009 to March 31, 2014. The
EBS quote data report the date, time, the highest bid quote, and the lowest ask
quote on the EBS broking system at the one-second frequency. The transactions
data include date, time, and deal price done on the ask side (highest paid) for the
one-second interval. Throughout the robust analysis, we focus on the data
sampled between 0:00 and 20:00 GMT, Monday to Friday, which represent the
active trading hours in the FX market.
B. Variable Definitions
B.1. Algorithmic Trading (AT)

Since the EBS data we have do not show the identifier of computer-initiated
trades, we cannot follow Chaboud et al.’s (2014) approach to identify AT directly.
Instead, we follow Hendershott, Jones, and Menkveld (2011) to calculate the
proxy to AT intensity for a specific trading period. Boehmer, Fong, and Wu
(2015) also follow Hendershott, Jones, and Menkveld (2011) to construct such a
proxy of AT from the intensity of order-related message traffic.
Hendershott, Jones, and Menkveld (2011) and Hasbrouck and Saar (2013)
indicate that AT activity is generally associated with fast order submissions and
cancellations. The proxy proposed by Hendershott, Jones, and Menkveld (2011)
reflects this concept. Following Hendershott, Jones, and Menkveld (2011), we
measure the intensity of AT in FX markets with the negative of trading volume in
USD 1 million divided by the number of messages. A message is defined as either
a trade or a quote update within a time interval. A higher value of the negative of
the dollar volume associated with each message reflects an increase in the
intensity of AT activity. Following Boehmer, Fong, and Wu (2015), we
accumulate our messages by the number of trades and one-second best quote
updates.3 We define the variable AT as follows:
Trading Dollar Volume
Algorithmic Trading
Number of Quotes Number of Deals
B.2. Measures of Price Efficiency

We follow Hasbrouck (1993) to calculate the pricing error for the
measurement of price efficiency. Hasbrouck assumes that the observed (log)
transaction price at time t, , can be decomposed into an efficient price, mt ,
and the pricing error, st :
, (1)
where contains the random factor, ( ), which can be presented as
. (2)
In the empirical analysis, we estimate the following vector autoregression
(VAR) model with two lags:
, , (3)
3 In order to make sure that it is robust to calculate the number of messages by the trades and best
quotes only, Boehmer, Fong, and Wu (2015) use the TAQ data to calculate the proxies for AT by the
order level method and the indirect measure used in Boehmer, Fong, and Wu (2015) and our paper.
They find that the results are similar, the correlation is larger than 0.9. Therefore, using the indirect
measure for AT is not a concern and does not affect the validity of our results.
, , (4)
where is the difference in (log) prices , and is a column vector of

trade-related variables: a trade sign indicator, signed trading volume, and signed
square root of trading volume. The design allows for concavity between prices
and trades. , and , are serially uncorrelated disturbances with zero-mean
from Eq. (3) and Eq. (4). We can derive the vector moving average (VMA)
representation that expresses the variables with respect to contemporaneous and
lagged disturbances from the above VAR model:
∗ ∗ ∗ ∗ ∗ ∗
, , , ⋯ , , , ⋯, (5)
∗ ∗ ∗ ∗ ∗ ∗
, , , ⋯ , , , ⋯. (6)
The pricing error can be calculated from Eq. (5). Under Beveridge and
Nelson’s (1981) identification restriction, the pricing error can be shown as
, , , ⋯ , , , ⋯, (7)
∑ ∗ ∑ ∗
where , . Finally, the variance of the pricing
error is computed as
∞
∑ ∝ . (8)
To make comparisons across intervals meaningful, σ s is normalized by the

standard deviation of , σ ( ), to control for differences across time intervals in
the return variance. The ratio / shows the proportion of deviations
from the efficient price ( ) in the total variability of the observable transaction
price process ( ). Therefore, we use it as an inverse measure of informational
efficiency of prices: a smaller ratio implies a more efficient trading price. In our
analysis, we refer this ratio as “pricing error” for brevity, and denote it as
follows:
Pricing Error Pricing Inefficiency . (9)
As noted, PE is an inverse measure of price efficiency. We use the one-second

data of prices and order flow from EBS to estimate PE for every 10 minutes and
for every hour. The unit-root test results suggest that both hourly PE and 10-min
PE are covariance-stationary for both EUR/USD and USD/JPY markets. To
further examine the evolution of price efficiency, we compute daily pricing errors
by averaging all 10-min PE measures within one day, and plot daily PE in Figure
1. As shown in Panel A, the pricing error is higher after the middle of 2013 in the
EUR/USD market. In contrast, Panel B shows that PE is lower in the beginning
of 2013 in the USD/JPY market.
(a) EUR/USD
40
40
35
35
30
30
25
25
%
20
20
15
15
10
10
55
II IIII III
III IV
IV II II III
II III IV
IV II II III
II III IV
IV II II III
II III IV
IV II II III
II III IV
IV II
2009
2009 2010 2011
2011 2012
2012 2013
2013
Year
(b) USD/JPY
40
40
35
35
30
30
25
25
%
20
20
15
15
10
10
55
II II III
II III IV
IV II II III
II III IV
IV II II III
II III IV
IV II IIII III
III IV
IV II II III
II III IV
IV II
2009
2009 2010
2010 2011
2011 2012
2012 2013
2013
Year
Figure 1. Daily Pricing Error (PE; Sample Period: January 1, 2009-

March 31, 2014)
Daily pricing error (PE) is the average of 10-min pricing error within a day.
B.3. Measures of Trading Activities

We measure the market activities by using the following variables, including
trading volume, effective spread, and buy and sell pressures.
(a) Trading Volume (TV)
We calculate the cumulated trading volume in U.S. dollar per hour and
denote it by TV. Figure 2 plots daily trading volume which is calculated as the
sum of all 10-min trading volume within a day. Panels A and B present that the
trading volume declines over time although there is a bounce in 2013 for both
EUR/USD and JPY/USD trading on the EBS platform.
(b) Relative Effective Spread (RES)
To consider the possible price movement arising from hidden liquidity, we
compute the relative effective spread, standardized by the quote midpoint at the
end of time interval
Relative Effecitve Spread 2 / ,
where is the trade price and is quote midpoint at the end of interval .
is a binary variable for trade direction, which is −1 for a seller-initiated trade
and +1 for a buyer-initiated trade.
Figure 3 displays the daily trading cost by averaging all 10-min RES measures
within a day. It indicates that the peak occurs at the beginning of 2009 and the
trading cost sharply declines after 2010. This pattern may reflect the impact of
the financial crisis from July 2008 to July 2011.
(c) Order Imbalance (OIB)
We calculate order imbalance (OIB) during an interval as the difference
between buyer-initiated trading volume and seller-initiated trading volume. We
further identify the buy and sell pressure as follows:
Buy Pressure max 0, ,

Sell Pressure max 0, .
III. Econometric Model

To study the association between AT and price efficiency, we use the
structural vector autoregressive (SVAR) model to capture their dynamic
relationship. Considering the possibility that market-wide trading activity and
market quality might drive both AT and price efficiency, we include trading
volume, relative effective spread, order imbalance, and weekday effects in the
model as follows.
(a) EUR/USD
1,400
1,400
1,200
1,200
1,000
1,000
USD Million
800
800
600
600
400
400
200
200
00
II IIII III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II IIII III
III IV
IV II
2009
2009 2010
2010 2011
2011 2012
2012 2013
2013
Year
(b) USD/JPY
1,200
1,200
1,000
1,000
800
800
USD Million
600
600
400
400
200
200
00
II II
II III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II
2009
2009 2010
2010 2011
2011 2012
2012 2013
2013
Year
Figure 2. Daily Trading Volume (Sample Period: January 1, 2009-

March 31, 2014)
Daily trading volume is calculated as the sum of all 10-min trading volume within a day.
(a) EUR/USD
1.2
1.2
1.0
1.0
0.8
0.8
%
0.6
0.6
0.4
0.4
0.2
0.2
II II
II III
III IV
IV II II
II III
III IV
IV II II III
II III IV
IV II II III
II III IV
IV II II III
II III IV
IV II
2009
2009 2010
2010 2011 2012
2012 2013
Year
(b) USD/JPY
.00013
.00013
.00012
.00012
.00011
.00011
.00010
.00010
.00009
.00009
%
.00008
.00008
.00007
.00007
.00006
.00006
.00005
.00005
.00004
.00004
II II
II III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II II III
II III IV
IV II II
II III
III IV
IV II
2009
2009 2010
2010 2011 2012
2012 2013
2013
Year
Figure 3. Average Relative Effective Spread (Sample Period: January
1, 2009-March 31, 2014)
Daily relative effective spread is calculated by averaging all 10-min relative effective spread within a
day.
(a) EUR/USD
150
150
100
100
50
50
USD Million
00
-50
-50
-100
-100
-150
-150
-200
-200
II II
II III
III IV
IV II II
II III
III IV
IV II II
II III
III IV
IV II II III
II III IV
IV II II
II III
III IV
IV II
2009
2009 2010
2010 2011
2011 2012
2012 2013
2013
Year
(b) USD/JPY
200
200
150
150
100
100
50
50
USD Million
00
-50
-50
-100
-100
-150
-150
-200
-200
I II
II III
III IV
IV I II
II III
III IV
IV II II
II III
III IV
IV I II
II III
III IV
IV I II
II III
III IV
IV II
2009
2009 2010
2010 2011 2012 2013
2013
Year
Figure 4. Daily Order Imbalance (OIB; Sample Period: January 1,

2009-March 31, 2014)
Daily order imbalance (OIB) is the sum of all 10-min order imbalance within a day.
 
5 5
ATt c1 j
α ATt ‐ j
1 j
β 0log PE t j 1
β j log PE t ‐ j γ 1TVt ‐1 1RES t ‐1
λ1 ,OIBt ‐1 η1OIBt‐‐1 d 11Mont d 21Tuet d 31 ,Wedt d 41Thut ε 1,t , (10a)
 
5 5
log PE t c2 j 1
 j log PE t ‐ j 0 ATt n 1 j
 ATt ‐1 γ 2TVt ‐1 2RES t ‐1
λ2OIBt ‐1 η2OIBt‐‐1 d 12Mont d 22Tuet d 32Wedt d 42Thut ε 2,t , (10b)

where AT is the proxy variable for AT activity, log is the inverse measure of
price efficiency, TV is the trading volume, RES is the relative effective spread,
OIB is the buy pressure, OIB - is the sell pressure. Mon, Tue, Wed, and Thu are
dummy variables for Monday, Tuesday, Wednesday and Thursday, respectively.
According to the AIC criterion, we choose five as the optimal lag length.
IV. Empirical Results
A. Intraday Periodicity of AT, Trading Volume, and Pricing Error

We examine the intraday patterns of AT, trading volume, and pricing error
by dividing the trading day into 21-hour intervals. Figure 5 plots the average AT
activity, trading volume and pricing error across 0:00 to 20:00 GMT for
EUR/USD and JPY/USD. It shows that the peak of trading volume occurs during
the period of 14:00 to 15:00 GMT which is the overlapping hour of London and
New York. However, Figure 5 shows that AT has a pattern opposite to that of
trading volume, suggesting that more AT activities occur when the market
trading is thinner. Carrion (2013) suggests that high-frequency traders provide
liquidity when the market is not liquid. Hence, we conclude that the algorithmic
traders enter the market to make profits by providing liquidity during non-active
hours. And by this pattern, we conjecture that algorithmic traders are more
likely to be liquidity suppliers on average.
Figure 6 shows that the pricing errors are smaller during active trading
intervals, 14:00 to 15:00 GMT in EUR/USD and USD/JPY markets. Gau and Wu
(2017) suggest that overall the price discovery ability in the overlapping hours is
larger than that of other trading hours because most U.S. macroeconomic
announcements are released during that period. Consistent with Wang and Yang
(2011), Piccotti (2016), and Gau and Wu (2017), we demonstrate that the largest
pricing error exists in the Asian period for the EUR/USD market.
Figure 6 illustrates that AT is positively correlated with pricing error,
indicating that algorithmic traders are prone to enter the market when pricing
error is large. The increase in pricing error implies that asset prices deviate from
the fundamental value. Viljoen, Westerholm, and Zheng (2014) show that the AT
Figure 5. Intraday Periodicity of Algorithmic Trading (AT) Measure and

Trading Volume (TV; Sample Period: January 1, 2009-March 31, 2014)
The time index on the X axis refers to the 60-min intervals from 0:00 to 20:00 GMT.
Figure 6. Intraday Periodicity of Algorithmic Trading (AT) Measure

and Pricing Error (PE; Sample Period: January 1, 2009-March 31,
2014)
The time index on the X axis refers to the 60-min intervals from 0:00 to 20:00 GMT.
activity is related to both public and private information and suggest that
algorithmic traders are informed. It seems that algorithmic traders enter the
market when the market price deviates from the efficient or intrinsic fundamental
price. Brogaard, Hendershott, and Riordan (2014) discover that informed
high-frequency traders play an advantageous role in enhancing price efficiency by
trading in the opposite direction to transitory pricing errors. Hence, Figure 6
provides evidence to support that the algorithmic traders are strategic informed
sometimes rather than only trade on trading volume and volatility. Nevertheless,
we cannot infer the causality between AT and price efficiency via Figure 6.
It is essential to examine the intraday periodicity and time trend in variables
in the high-frequency data analysis. As shown in Figures 5 and 6, the intraday
periodicity of AT and PE is salient. Therefore, we have to deal with the intraday
seasonality when analyzing the high-frequency intraday data. To deseasonalize
the intraday seasonality in a variable, we estimate a set of multipliers by
regressing the variable on the set of seasonal dummy variables corresponding to
time periods and then obtain a deseasonalized series. We also remove the time
trend in AT, PE, and other control variables, including TV (trading volume), RES
(relative effective spread) or QS (quoted spread), and order imbalances OIB + and
OIB -. Table I provides a descriptive summary of detrended and deseasonalized
variables of AT, PE, TV, RES, OIB +, and OIB -. The estimation results of structural
vector autoregressive (SVAR) models reported in the paper are based on AT, PE,
and other market quality variables after removing time trend and intraday
seasonality.4
B. Relations between AT and Market Conditions

To detect the relations between AT and pricing error, trading volume, spread
and order imbalance, we divide our sample into five groups based on the size of
AT. For example, the first group includes those data with the lowest 20% of AT
and the fifth group indicates the subsample of data with the highest 20% of AT.
Panel A of Table II shows that the pricing error is the lowest and trading volume,
spread, order imbalances for buy and sell sides are the highest for the lowest-AT
percent of data, compared with Panels B-E, as algorithmic traders are least
active. On the contrast, Panel E of Table II displays that the pricing error is the
highest and the dollar trading volume, spread, order imbalances for buy and sell
sides are the lowest for the subsample of highest 20% of AT, as algorithmic
traders are most active.
4 We thank the anonymous referee for suggesting the removal of intraday seasonality and time trend in
variables analyzed in the empirical models.
Table I
Summary Statistics of Detrended and Deseasonalized Variables
Algorithmic trading (AT) refers to the intensity of algorithmic trading, defined as the ratio of trading
volume divided by the total numbers of quotes and trades multiplied by -1. PE refers to the normalized
pricing error (σ(s)/σ(p)), and is the proxy of price inefficiency, where σ(s) is the volatility of pricing error
defined by Hasbrouck (1993). Trading volume (TV) is the logarithm of trading dollar volume. Relative
effective spread (RES) is the relative effective spread, standardized by the quote midpoint at the end of
time interval. OIB+=max(0,OIB), where OIB means hourly order imbalance and is defined by the share
volumes initiated by buyers in excess of the share volumes initiated by sellers; we can use OIB+ to
measure the buy pressure. OIB-=max(0,-OIB), which is used to measure the sell pressure. We report
descriptive statistics for detrended and deseasonalized variables on the hourly basis, considering the
salient periodicity in the intraday data. S.D. denotes the standard deviation. JB denotes the Jarque-Bera
normality test statistic.
AT PE TV RES OIB + OIB -

Panel A. EUR/USD
Mean -0.96 13.88 474.07 0.57 45.81 54.98
S.D. 0.42 9.09 443.33 0.18 88.14 100.34
Median -0.88 11.44 335.86 0.55 0.00 4.00
Minimum -3.20 1.49 3.18 -0.21 0.00 0.00
Maximum -0.15 90.69 3566 2.55 1023 1430
Skewness -0.85 1.74 1.69 0.79 3.39 3.29
Kurtosis 3.55 7.48 6.78 5.36 19.43 20.21
JB 3,291 33,115 26,491 8,259 324,684 349,185
(p-value) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Number of Observations 24,676 24,676 24,676 24,676 24,676 24,676
Panel B. USD/JPY
Mean -0.88 2.73 244.51 0.58 39.96 42.98
S.D. 0.35 0.54 209.23 0.36 88.07 113.15
Median -0.86 2.75 187.37 0.61 0.00 2.00
Minimum -4.90 0.48 2.30 -1.91 0.00 0.00
Maximum -0.12 4.42 4208 4.32 2578 7083
Skewness -0.71 1.34 2.96 -0.06 7.70 28.30
Kurtosis 5.03 5.65 21.21 3.80 137 1,458
JB 6,306 140 377,085 677 1.87E7 2.18E9
(p-value) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Number of Observations 24,676 24,676 24,676 24,676 24,676 24,676
The results for USD/JPY are similar to those for EUR/USD, showing that the
pricing error is increasing, and trading volume, spread, and order imbalances for
buy and sell sides are declining as AT activities increase. Therefore, we
hypothesize that AT and price efficiency have a reverse relationship, and price
efficiency deteriorates and liquidity, trading cost and order imbalance decrease
when algorithmic traders are more active.
Table II
Summary Statistics for Detrended and Deseasonalized Variables:
Sample Sorted on AT
AT PE TV RES OIB + OIB -

Panel A. EUR/USD
The Lowest 20% of AT
Mean -1.63 7.83 0.69 1,076 70 93
Median -1.56 7.18 0.68 997 0 23
Maximum -1.30 35.50 2.55 3,567 1,023 1,430
Minimum -3.20 1.49 0.24 150 0 0
Std. Dev. 0.27 3.65 0.13 490 126 141
Skewness -1.19 1.38 1.54 1 3 2
Kurtosis 4.50 6.63 15.47 5 12 11
Between 20% and 40% of AT
Mean -1.13 10.88 0.61 537 53 60
Median -1.13 9.91 0.58 482 0 4
Maximum -0.99 43.66 1.45 2,008 1,004 1,387
Minimum -1.30 1.78 0.17 37 0 0
Std. Dev. 0.09 5.35 0.16 282 91 101
Skewness -0.17 1.30 0.76 1 3 3
Kurtosis 1.82 5.94 3.79 5 14 17
Mean -0.88 13.21 0.56 385 43 53
Median -0.88 11.65 0.52 281 0 3
Maximum -0.78 56.31 1.46 1,355 819 1,338
Minimum -0.99 2.10 0.04 27 0 0
Std. Dev. 0.06 7.56 0.16 272 80 96
Skewness -0.09 1.28 1.00 1 3 4
Kurtosis 1.79 5.29 4.50 3 17 28
Mean -0.70 16.16 0.53 252 36 42
Median -0.70 13.71 0.49 181 0 2
Maximum -0.61 77.27 2.08 827 697 842
Minimum -0.78 2.82 0.12 12 0 0
Std. Dev. 0.05 9.40 0.17 181 67 78
Skewness 0.03 1.38 1.21 1 3 3
Kurtosis 1.83 5.67 6.04 2 18 17
The Highest 20% of AT
Mean -0.47 21.34 0.48 120 27 27
Median -0.48 18.79 0.46 94 1 0
Maximum -0.15 90.69 2.05 478 777 754
Minimum -0.61 3.83 -0.21 3 0 0
Std. Dev. 0.09 10.90 0.17 85 51 52
Skewness 0.50 1.35 1.66 1 4 4
Kurtosis 2.38 5.58 10.16 4 30 30
Table II (Continued)
AT PE TV RES OIB+ OIB-
Panel B. USD/JPY
The Lowest 20% of AT
Mean -1.39 13.01 448 0.81 59 61
Median -1.34 11.55 366 0.89 0 1
Maximum -1.16 59.56 4,208 4.32 2,578 7,083
Minimum -4.90 1.62 44 -0.11 0 0
Std. Dev. 0.23 7.04 303 0.36 137 209
Skewness -3.32 1.28 2 -0.46 8 22
Kurtosis 33.62 5.45 13 7.33 103 616
Mean -1.05 15.74 291 0.60 43 47
Median -1.05 13.89 252 0.67 0 2
Maximum -0.95 70.40 1,463 2.91 1,073 1,209
Minimum -1.16 2.41 33 0.00 0 0
Std. Dev. 0.06 8.36 171 0.39 86 87
Skewness -0.10 1.38 1 -0.32 4 3
Kurtosis 1.81 5.73 5 2.33 34 29
Mean -0.86 17.02 224 0.46 38 41
Median -0.86 15.22 205 0.56 0 3
Maximum -0.76 74.90 842 2.25 1,052 730
Minimum -0.95 2.36 16 -1.17 0 0
Std. Dev. 0.05 8.55 119 0.38 72 71
Skewness 0.00 1.39 1 0.03 3 3
Kurtosis 1.82 5.86 5 2.12 27 17
Mean -0.67 18.74 164 0.47 33 37
Median -0.67 17.01 149 0.54 0 3
Maximum -0.56 77.09 648 2.43 1,126 764
Minimum -0.76 3.21 6 -0.40 0 0
Std. Dev. 0.06 9.15 84 0.31 66 66
Skewness 0.03 1.39 1 -0.13 4 3
Kurtosis 1.76 6.22 4 3.19 43 20
The Highest 20% of AT
Mean -0.44 23.91 94 0.53 26 28
Median -0.45 21.82 83 0.54 0 2
Maximum -0.12 83.44 360 2.35 719 560
Minimum -0.56 4.61 2 -1.91 0 0
Std. Dev. 0.09 10.89 54 0.19 49 50
Skewness 0.64 1.07 1 0.05 3 3
Kurtosis 2.70 4.48 4 14.85 26 18
C. Structural Vector Autocorrelation (SVAR) Analysis
C.1. Algorithmic Trading and Pricing Error

Table III reports the estimation results of the SVAR model of AT and PE for
both EUR/USD and USD/JPY markets. In the EUR/USD market, we find a
positive contemporaneous relation between AT and log PE , implying that
algorithmic traders tend to be more active when the informational efficiency of
prices in the EUR/USD market is lower. The results are consistent with those in
Figure 6 and Table II.
Regarding autoregressive structure of AT and pricing error for the EUR/USD
market, Model 1 indicates that the first-order autocorrelation is significant and
positive, and the higher-order autocorrelations decline monotonically as the
number of lags increases. The dynamic interaction between AT and
informational efficiency is significant and negative from the second lag term,
suggesting that the arrival of algorithmic trades enhances the price efficiency,
consistent with Brogaard, Hendershott, and Riordan (2014). We still find that
the pricing error has a negative association with AT from two to five lags after we
replace the relative effective spread with the quoted spread, as shown in Model 2.
Considering the characteristics of the FX market, we further include the
dummy variables for the implementation of daylight saving time (DST), the open
hours of London (LNO), and the open hours of New York (NYO) into Model 3.
The inclusion of those dummy variables does not affect the significant
relationship between AT and PE, though the effect of AT on PE is decreasing.
In Table III we find that, in the EUR/USD market, trading volume is
negatively associated with pricing error. This suggests that informed trading is
accompanied by the larger trading volume. Kyle (1985) and Easley and O’Hara
(1987) suggest that informed traders prefer to trade with a larger trading volume.
Besides, informed traders are more likely to enter the market when the market
trading is active. Hence, the larger trading volume can enhance the price
efficiency. Boehmer and Wu (2012) also address that the pricing errors for stocks
with heavier trading are smaller. The higher spread prevents arbitrageurs from
trading on some pricing errors and therefore leads to lower informational
efficiency. This explains for the positive coefficient on RESt‐1 in the equation of
log PE , which indicates that the lower effective spread boosts the price efficiency.
According to the information asymmetry model of Easley, Kiefer, and O’Hara
(1996). the order imbalance or order flow is related to private information. It
implies that some important information is only revealed to some investors and
the others do not catch the information. Therefore, if the higher ratio of order
imbalance is driven by informed trading, the order imbalance could improve the
price efficiency. On the other hand, if the uninformed trading leads to the large
order imbalance, the order imbalance could lead to the decrease in price
efficiency. Table III shows that lagged order imbalance leads to an increase in
pricing error, at both buy and sell sides. Our results show that the lagged order
imbalances could be resulted from noise trading. Brogaard, Hendershott, and
Riordan (2019) show that AT contributes more to price discovery by limit orders
rather than market orders. Moreover, they indicate those non-executed limit
orders from algorithmic traders contain more information. It means that in the
fast algorithmic-trading environment, most information from AT activities is
revealed from the liquidity supplying; therefore the order imbalance could be
less informative in the situation.
Chen and Gau (2014) indicate the dominance of bid quotes in price discovery
is stronger on Monday, but is weaker on Friday. Hence, we control the weekday
effect by Mon, Tue, Wed, and Thu in our model. Model 1 of Table III shows that
coefficients of those weekday dummy variables are significantly negative. It
implies that, compared with Friday (the base case), price efficiency significantly
varies with day-of-week dummy variables. The EUR/USD market is more
informational efficient on Mondays, Tuesdays, Wednesdays, and Thursdays.
Consistent with Chen and Gau (2014), we find that the price discovery is lower
on Friday. But the Monday effect on price efficiency is not the strongest and even
is weaker than that of Tuesday, Wednesday, and Thursday. Similarly, we still
find that the price discovery is stronger on Tuesday, Wednesday, and Thursday
in Models 2 and 3. But the effect of Monday disappears in Model 2 and even
becomes positively associated with pricing error. Easley and O’Hara (1987) study
the influence of trade size on security prices and discover that trade size is
closely related to trader’s private information. And Viljoen, Westerholm, and
Zheng (2014) suggest that the trading size is smaller on Mondays. Hence, the
result of Model 3 is consistent with their arguments.
Apart from the day-of-the-week effect, we consider the daylight saving effect
and the opening effect of London and New York trading segments. Table III
presents that the pricing error significantly decreases during the daylight-
saving-time period. The pricing errors also significantly decrease during the
opening hour of New York trading. Gau and Wu (2017) address that the
overlapping trading hours of London and New York dominate price discovery in
the FX market, and show that the higher contribution to price discovery of the
overlapping hours of London and New York trading is driven by news arrivals
upon U.S. macroeconomic announcements and most of the U.S. announcements
are released around the opening hours of New York market.
The right panel of Table III reports the estimation results of the SVAR of AT
and log PE for the USD/JPY market. Considering the contemporaneous effect,
Table III demonstrates that AT activity is positively related to pricing error in
the USD/JPY market, which is similar to the results in the EUR/USD market.
The autoregressive structure of log PE also shows that price efficiency is

positively autocorrelated and the autocorrelation declines monotonically as the
number of lags increases. We also find a negative lead-lag relationship between
AT and PE from the second lag in the USD/JPY market, indicating more AT
activities can enhance the price efficiency subsequently.
Table III also shows that, in the USD/JPY market, lagged trading volume can
improve the price efficiency, as shown by the negative coefficient of TVt‐1 in the
equation of log PEt . Moreover, the spread is negatively associated with AT and
PE, suggesting that the higher trading cost discourages algorithmic trading
activities and leads to lower informational efficiency of prices in the USD/JPY
market. We also find that order imbalances at the buy- and sell-sides
significantly and positively affect pricing errors.
In the USD/JPY market, we observe that dummy variables for days of the
week, daylight saving time, and New York open are significantly related to
pricing errors. Consistent with the finding in the EUR/USD market, we find that
the pricing error is lower on Mondays, Tuesdays, Wednesdays, Thursdays, and
days with daylight saving time, and at New York opening hour, in the USD/JPY
market.
C.2. AT and Information Share

We further consider the alternative measures for informational efficiency of
prices for the robustness check. We calculate the information share (IS) to
replace PE in our analysis. Following Wang and Yang (2011), we define IS as
follows:
RVt E
IS t  20 , (11)
RV
i 1
t
E
20
where RVt E is realized price variance of the i-hour in day t; RV
i 1
t
E
is the sum
of the realized price variance on day t from the first hour to twentieth hour.
The first column of Table IV shows a negative contemporaneous relation
between AT and IS, implying that algorithmic traders enter the market as the
price discovery is lower, which is consistent with the results from the earlier
analysis based on the PE, for the EUR/USD market.
Table IV shows that the autoregressive structure of IS is similar to that of PE
shown in Table III. The first-order autocorrelation of IS is significant and
positive, and the higher-order autocorrelations decline monotonically as the
number of lags increases. Likewise, the information share has a positive
association with AT for up to three lags, supporting that the algorithmic trades
can prove the price efficiency.
72
Table III
The Dynamic Relation between Algorithmic Trading (AT) and Pricing Error (PE)
Model 1 is specified as follows:
5 5
ATt  c 1   j 1  j ATt  j  0 log PE t   j 1  j log PE t  j   1TVt 1  1RES t 1  1,OIBt1  1OIBt1  d 11Mont  d 21Tuet  d 31,Wed t  d 41Thut   1,t ,
5 5
log PE t  c 2   j 1  j log PE t  j  0 ATt  n 1 j ATt  j  2TVt 1  2RES t 1  2OIBt1  2OIBt1  d 12Mont  d 22Tuet  d 32Wedt  d 42Thut   2,t ,
where AT is the proxy variable for algorithmic trading activity, log PE refers to the logarithm pricing error and is the inverse measure of price efficiency, TV is the
trading volume, RES is the relative effective spread, OIB+ is the buy pressure, and OIB- is the sell pressure. Mon, Tue, Wed, and Thu are the dummy variables for Monday,
Tuesday, Wednesday and Thursday, respectively. In Model 2, the alternative measure of liquidity, quoted spread (QS) is used to replace the RES. In Model 3, dummy
variables for the implementation of daylight saving time (DST), the open of London market (LNO), and the open of New York market (NYO) are included. The optimal
length of lags is determined by the AIC criterion. The Newey-West robust t-values (Newey and West (1987)) are reported in parentheses. *, **, and *** denote statistical
significance at the 10%, 5% and 1% levels, respectively.
EUR/USD USD/JPY
Model 1 Model 2 Model 3 Model 1 Model 2 Model 3
ATt log PEt ATt log PEt ATt log PEt ATt log PEt ATt log PEt ATt log PEt
-178.000*** 10.460 *** -157.000 *** 9.000*** 144.000*** ***
-14.000 -345.62 *** ***
15.741 -304.143 *** 13.763 *** 93.723 *** -4.483***
Constant
(-5.92) (31.11) (-5.80) (30.72) (60.65) (-28.12) (-8.95) (40.03) (-5.06) (38.64) (31.6) (-7.92)
log PEt 0.002*** -0.000*** -0.000 -0.000* -0.000*** -0.000
(3.91) (-4.32) (-0.99) (-1.86) (-2.67) (0.45)
ATt 17.020*** 17.050*** 10.198*** 21.962*** 22.102*** 20.999***
(89.88) (90.73) (46.59) (94.84) (103.45) (37.11)
ATt 1 -48.200*** 2.886*** -40.077*** 2.402*** -15.351*** 1.505*** -61.290*** 2.817*** -57.844*** 2.643*** -57.422*** 2.762***
(-90.79) (8.26) (-91.64) (6.95) (-95.22) (4.65) (-63.4) (7.32) (-61.95) (6.83) (-66.32) (7.54)
ATt 2 2.646*** -0.147 5.806*** -0.332 1.847*** -0.181 44.435*** -2.017*** 47.428*** -2.140*** 27.711*** -1.312***
Journal of Financial Studies Vol. 28 No. 2 June 2020
(16.38) (-0.45) (16.53) (-1.02) (17.98) (-0.6) (16.79) (-5.85) (16.4) (-6.19) (19.98) (-4.01)
ATt 3 14.212 -0.835** 14.965 -0.878*** 1.957* -0.192 66.758 -3.039*** 66.207 -2.995*** 54.31*** -2.585***
(0.29) (-2.57) (0.28) (-2.69) (1.84) (-0.63) (1.43) (-8.7) (1.47) (-8.55) (2.73) (-7.79)
ATt 4 15.655*** -0.922*** 15.029*** -0.884*** 6.141*** -0.602** 4.562*** -0.206 -0.145*** 0.009 5.244*** -0.248
(4.59) (-2.83) (4.7) (-2.71) (4.01) (-2.00) (5.78) (-0.59) (-6.12) (0.03) (5.99) (-0.75)
Table III (Continued)
EUR/USD USD/JPY
ATt 5 44.885*** -2.642*** 42.182*** -2.478*** 20.682*** -2.028*** -45.368*** 2.073*** -53.213*** 2.415*** -29.784*** 1.425***
(9.44) (-10.02) (9.99) (-9.33) (7.62) (-8.33) (-21.9) (6.58) (-22.53) (7.66) (-20.99) (4.76)
log PEt ‐1 -4.304*** 0.253*** -4.403*** 0.258*** -1.914*** 0.188*** -3.613*** 0.164*** -3.761*** 0.170*** -2.926*** 0.139***
(-3.97) (34.1) (-3.95) (34.91) (-14.57) (27.11) (-11.82) (21.69) (-10.97) (22.44) (-15.48) (19.27)
log PEt ‐2 -1.503*** 0.088*** -1.557*** 0.091*** -0.749*** 0.073*** -1.739*** 0.079*** -1.813*** 0.082*** -1.706*** 0.081***
(-8.3) (11.53) (-8.26) (11.92) (-11.23) (10.37) (-9.43) (10.37) (-8.83) (10.73) (-9.38) (11.2)
log PEt ‐3 -0.624*** 0.037*** -0.644*** 0.038*** -0.433*** 0.042*** -1.009*** 0.046*** -1.052*** 0.048*** -1.203*** 0.057***
(-5.51) (4.76) (-5.47) (4.89) (-4.94) (5.98) (-7.38) (6.01) (-6.94) (6.21) (-5.91) (7.89)
log PEt ‐4 -0.353*** 0.021*** -0.374*** 0.022*** -0.404 0.04*** -0.068*** 0.003 -0.101*** 0.005 -0.386*** 0.018**
(-2.84) (2.71) (-2.79) (2.86) (-0.21) (5.57) (-7.77) (0.4) (-7.32) (0.6) (-5.99) (2.54)
log PEt ‐5 -0.935*** 0.055*** -0.952*** 0.056*** -0.644*** 0.063*** -1.256 0.057*** -1.331 0.060*** -1.382 0.066***
(-3.44) (7.51) (-3.58) (7.62) (-5.01) (9.25) (-0.85) (7.71) (-0.27) (8.11) (-0.36) (9.32)
TVt 1 0.217*** -0.01*** 0.265*** -0.016*** 0.036*** -0.004*** 0.419*** -0.019*** 0.560*** -0.025*** 0.222*** -0.011***
(6.62) (-14.35) (7.24) (-19.00) (19.92) (-4.19) (7.21) (-12.63) (3.16) (-18.17) (13.14) (-7.27)
RESt 1 8.691 -0.511*** 5.750** -0.564*** 12.758*** -0.581*** 11.740*** -0.560***
(1.28) (-8.39) (2.05) (-9.95) (10.54) (-11.24) (10.05) (-11.3)
QSt 1 0.017*** -0.001*** -14.178*** 0.641***
(4.407) (-3.075) (-3.45) (3.79)
 -0.029*** 0.002*** -0.030*** 0.002*** -0.011*** 0.001* -0.033* 0.002** -0.051*** 0.002*** -0.008 0.000
OIB t　-1
(-12.06) (2.74) (-12.04) (2.85) (-12.00) (1.86) (-1.67) (2.04) (-2.98) (3.11) (-0.17) (0.51)
 -0.013*** 0.001 -0.014*** 0.001 -0.005*** 0.001 -0.056 0.003*** -0.061 0.003*** -0.017*** 0.001
OIB t　
- 1
(-9.9) (1.34) (-9.94) (1.47) (-10.46) (1.01) (-1.04) (4.34) (-0.3) (4.71) (-4.2) (1.48)
Mont 4.435 -0.261* 3.890 -0.228 -3.070*** 0.301** -12.803* 0.583*** -13.375* 0.605*** -27.449*** 1.308***
(0.21) (-1.65) (0.16) (-1.45) (-4.37) (2.07) (-1.72) (3.13) (-1.73) (3.24) (-5.78) (7.38)
Tuet 11.022*** -0.648*** 9.930*** -0.583*** 6.995*** -0.686*** 12.141 -0.553*** 10.277 -0.465*** 3.812 -0.181
(3.06) (-4.38) (3.16) (-3.94) (3.5) (-5.03) (1.44) (-3.18) (1.05) (-2.67) (0.63) (-1.1)
Wedt 9.737*** -0.573*** 8.837*** -0.519*** 9.047*** -0.887*** 13.934* -0.635*** 12.318 -0.558*** 10.928 -0.521***
(2.82) (-3.85) (2.94) (-3.49) (5.60) (-6.47) (1.88) (-3.63) (1.52) (-3.19) (1.37) (-3.14)
73
74
Table III (Continued)
EUR/USD USD/JPY
Thut 10.123*** -0.600*** 9.705*** -0.570*** 8.748*** -0.858*** 11.258** -0.513*** 10.310** -0.467*** 7.394* -0.352**
(2.88) (-4.00) (2.93) (-3.82) (5.32) (-6.24) (2.24) (-2.93) (2.04) (-2.66) (1.65) (-2.12)
DSTt 111.742*** -10.960*** 189.408*** -9.030***
(73.51) (-64.93) (52.57) (-50.45)
LNOt -0.836*** 0.082 3.954 -0.188
(-6.88) (0.86) (0.11) (-1.62)
NYOt 12.670*** -1.242*** 33.564** -1.599***
(4.69) (-5.52) (2.53) (-6.12)
F-test 5,355 467 5,316 498 6,524 540 6,808 219 5,978 239 7,462 234
Adjusted R2 0.7510 0.3113 0.7523 0.3130 0.7546 0.3160 0.6401 0.1545 0.6426 0.1545 0.6441 0.1582
Log Likelihood 3,541 -84,848 3,605 -84,817 3,720 -84,763 3,660 -88,726 3,747 -88,727 3,800 -88,671
Number of 24,671 24,671 24,671 24,671 24,671 24,671 24,671 24,671 24,671 24,671 24,671 24,671
Observations
Also, most of the control variables have the similar effects on the price
efficiency. We find that trading volume and trading cost are positively and
negatively correlated with information share, respectively, which indicates that
the higher trading volume and lower trading cost would attract informed traders
and the price efficiency therefore increases. But, we do not find that the order
imbalance and day-of-the-week significantly associate with information share.
The second column of Table IV implies that the AT contributes to price
discovery in the USD/JPY market in terms of IS measurement and all of those
control variables have the similar effects on information share as the results in
Table III.
Table IV
The Dynamic Relation between Algorithmic Trading (AT) and
Information Share (IS)
The table reports the estimation results of the following model:
5 5
ATt  c 1   j ATt  j  0IS   j IS t  j   1TVt 1  1RES t 1  1OIBt 1  1OIBt ‐ 1
j 1 j 1
d 11Mon t d 21Tuet  d 31Wedt  d 41Thut  a1DSTt  a2LNOt  a3NYOt   1,t ,
5 5
IS t  c 2   j IS t  j  0 ATt   j ATt  j   2TVt 1  2RES t 1  2OIBt 1  2OIBt‐ 1
j 1 n 1
d 12Mon t d 22Tuet  d 32Wed t  d 42Thut  b1DSTt  b2LNOt  b3NYOt   2,t ,
where AT is the proxy variable for algorithmic trading activity, IS refers to the information share, the
alternative measure price efficiency. TV is the trading volume, RES is the relative effective spread, OIB +
is the buy pressure, and OIB - is the sell pressure. Mon, Tue, Wed, and Thu are the dummy variables for
Monday, Tuesday, Wednesday and Thursday, respectively. Dummy variables for the implementation of
daylight saving time (DST), the open of London market (LNO), and the open of New York market (NYO)
are considered in the model. The optimal length of lags is determined by the AIC criterion. The
Newey-West robust t-values (Newey and West (1987)) are reported in parentheses. *, **, and *** denote
statistical significance at the 10%, 5% and 1% levels, respectively.
EUR/USD USD/JPY
Constant -1.174*** -1.934*** -0.788*** -2.801***

(-92.69) (-207.26) (-66.07) (-201.18)
-1.691*** -3.627***
(-5.83) (-4.40)
-0.000*** -0.012
(-23.74) (-20.26)
0.803*** 1.358*** 0.567*** 2.056
(100.59) (3.17) (72.51) (1.02)
0.143*** 0.242*** 0.128*** 0.464**
(18.38) (3.44) (18.29) (2.53)
0.044*** 0.076* 0.012* 0.042
(5.72) (1.90) (1.66) (1.03)
Table IV (Continued)
EUR/USD USD/JPY
-0.017** -0.029 0.055*** 0.201*

(-2.21) (-1.03) (7.9) (1.94)
-0.035*** -0.060*** 0.157*** 0.570***
(-5.67) (-6.61) (24.94) (5.22)
8.695*** 14.782*** 4.876*** 17.678*
(35.75) (15.94) (23.75) (1.89)
3.206*** 5.394*** 1.050*** 3.782***
(13.9) (6.22) (5.73) (6.19)
3.32*** 5.582*** 1.612*** 5.816***
(14.5) (7.25) (8.83) (6.99)
1.902*** 3.211 2.943*** 10.667*
(8.32) (1.16) (16.21) (1.95)
1.906*** 3.215** 2.15*** 7.796
(8.88) (1.96) (12.17) (0.55)
0.0004*** 0.001*** 0.001*** 0.002***
(17.91) (10.81) (16.65) (9.03)
-0.008*** -0.014*** -0.013*** -0.046
(-5.214) (-7.881) (-10.52) (-1.00)
0.0002*** 0.0003 -0.0000 -0.0004***
(10.17) (1.28) (-0.78) (-4.54)
0.0001*** 0.0002 -0.0001*** -0.0003***
(10.17) (0.47) (-6.94) (-12.62)
0.018*** 0.029*** 0.018*** 0.063***
(4.68) (12.99) (4.31) (10.53)
0.000 0.001*** 0.007* 0.025***
(0.02) (-8.46) (1.90) (11.18)
-0.004 -0.008*** 0.005 0.017***
(-1.22) (-2.99) (1.26) (7.06)
-0.011*** -0.019*** 0.000 0.000***
(-3.08) (-2.74) (0.07) (-7.59)
DSTt -0.407*** -0.669*** -0.272*** -0.965***
(-88.74) (-211.62) (-62.10) (-203.00)
LNOt 0.011*** 0.018 0.005* 0.019**
(4.3) (0.66) (1.95) (2.54)
NYOt 0.004 0.006*** 0.017*** 0.062***
(0.72) (7.11) (2.88) (8.46)
F-test 5,579.76 463.50 6,601.42 377.9
2
Adjusted R 20.73 0.60 20.77 0.76
Log Likelihood 1,059.57 0.88 1,063.09 1.41
Number of Observations 24,671 24,671 24,671 24,671
C.3. Financial Crisis Effects

In this study, the sample period covers the subprime mortgage crisis and the
Euro area sovereign debt crisis; therefore, we reexamine the influence of crisis
on the connection between AT and PE in the subsample periods. We follow
Chang, Gau, and Hsu (2017) to define two crisis periods, subprime mortgage
financial crisis (August 2008 to March 2009) and European sovereign debt crisis
(October 2009 to July 2011), respectively. Model 1 of Table VII displays that the
contemporaneous relation between AT and price error is significantly positive
during the subprime mortgage financial crisis period in the EUR/USD market.
However, it shows that price error positively associates with the first and fourth
lags of AT and only negatively associates with the fifth lag of AT. It implies that
the benefits of AT to price efficiency would decrease during the financial crisis.
Brogaard, Hendershott, and Riordan (2019) show that algorithmic traders will
not always improve the price discovery by supply liquidity and they will shift to
submit market orders as price volatility increases. Hence, the effect of AT on
price efficiency would become weaker during the crisis period because
algorithmic traders need liquidity to trade on information advantage and the
liquidity dries up during the crisis period.
The analysis based on the subsample period covering the European sovereign
debt crisis also shows that algorithmic traders will be more active when pricing
error is higher, similar to the results of Table III. Overall, the subsample analysis
shows that the role of AT during the crisis periods is similar to that in normal
time, but the effect of AT on price efficiency is relatively weaker. Therefore, our
finding supports the arguments in Brogaard, Hendershott, and Riordan (2019),
suggesting that algorithmic traders will change their trading strategies when the
market is more volatile in the EUR/USD market.
The results for the control variables are consistent with those reported in
Table III, but order flow becomes ineffective. Moreover, we find that order flow
shifts to devoting to price discovery as algorithmic traders shift to being g
informed traders who prefer to submit aggressive orders. Hence, this result
supports our conjecture earlier that the active algorithmic trading activities
would affect the relation between order imbalance and price efficiency.
The results in the JPY/USD market reported in Table V are similar to those in
the EUR/USD market, indicating algorithmic trading activities help improve the
price efficiency during the crisis periods; however the effect is weaker than that
during the normal time. We further find that, during the period of sovereign debt
crisis, ATt ‐2 and ATt ‐3 are significantly and negatively related to PEt, which is
consistent with the results in Table III. The unchanged relationship between PEt ’s,
and lagged AT terms suggest that the European sovereign debt crisis barely affects
the relation between price efficiency and AT in the USD/JPY market.
Similar to the results in the EUR/USD market shown in Table V, most of the
relations between control variables and pricing error for the USD/JPY market
remain unchanged during the crisis periods. Likely, we also find that the order
imbalance becomes less effective on PE. But, OIB - is still positively associated
with PE, similar to the results in normal time (as shown in Table III). Therefore,
78
Table V
The Dynamic Relation between Algorithmic Trading (AT) and Pricing Error (PE) during Periods of Financial Crisis
To examine whether the relationship changes during financial crisis period, we consider two subsample periods: August 2008-March 2009 (the subprime mortgage
financial crisis) and October 2009-July 2011 (European sovereign debt crisis). The model is specified as follows:
5 5
ATt  c 1   j 1  j ATt  j  0 log PE t   j 1  j log PE t  j   1TVt 1  1RES t 1  1,OIBt1  1OIBt1
d 11Mont  d 21Tuet  d 31,Wedt  d 41Thut  a1DSTt  a2LNOt  a3NYOt   1,t ,
5 5
log PE t  c 2   j 1  j log PE t  j  0ATt  n 1 j ATt  j  2TVt 1  2RES t 1  2OIBt1  2OIBt1
d 12Mont  d 22Tuet  d 32Wedt  d 42Thut  b1DSTt  b2LNOt  b3NYOt   2,t ,
where AT is the proxy variable for algorithmic trading activity, log PEt denotes the logarithm pricing error and is the inverse measure of price efficiency. TV is the
trading volume, RES is the relative effective spread, OIB+ is the buy pressure, and OIB- is the sell pressure. Mon, Tue, Wed, and Thu are the dummy variables for Monday,
Tuesday, Wednesday and Thursday, respectively. Dummy variables for the implementation of daylight saving time (DST), the open of London market (LNO), and the
open of New York market (NYO) are considered in the model. The optimal length of lags is determined by the AIC criterion. The Newey-West robust t-values (Newey
and West (1987)) are reported in parentheses. *, **, and *** denote statistical significance at the 10%, 5% and 1% levels, respectively.
EUR/USD USD/JPY
Subsample 1: Subsample 2: Subsample 1: Subsample 2:
Subprime Mortgage European Sovereign Subprime Mortgage European Sovereign
Financial Crisis Debt Crisis Financial Crisis Debt Crisis
ATt log PEt ATt log PEt ATt log PEt ATt log PEt
Constant -261.36** 16.56*** -96.03 7.45*** -172.96*** 18.78*** -255.95** 13.237***
(-2.10) (9.25) (-0.87) (18.03) (-4.61) (6.11) (-2.07) (21.71)
0.00 -0.00*** 0.01*** -0.00
log PEt
(1.53) (-10.56) (8.57) (-1.46)
ATt 15.78*** 12.90*** 9.19*** 19.34***
(26.06) (54.26) (4.54) (54.62)
ATt 1 -135.28*** 8.63*** -72.04*** 5.58*** -22.28*** 2.46 -10.99*** 0.57
(-21.56) (7.79) (-64.93) (17.03) (-7.32) (1.09) (-35.67) (0.96)
Table V (Continued)
EUR/USD USD/JPY
ATt 2 14.17 -0.90 0.39*** -0.04 8.13 -0.89 35.45*** -1.83***
(0.29) (-0.69) (10.74) (-0.09) (0.51) (-0.53) (10.27) (-3.43)
ATt 3 18.76* -1.19 -1.67 0.15 25.44 -2.77* 40.37*** -2.09***
(1.68) (-0.88) (-1.06) (0.36) (1.63) (-1.71) (2.95) (-3.88)
ATt 4 -34.66* 2.20* 16.55*** -1.27*** 0.69 -0.08 8.53 -0.44
(-1.76) (1.67) (2.86) (-3.17) (1.19) (-0.05) (1.6) (-0.83)
ATt 5 34.00*** -2.16* 50.79*** -3.93*** -38.32*** 4.19*** -33.81*** 1.75***
(2.7) (-1.88) (4.53) (-11.38) (-5.40) (2.80) (-11.23) (3.61)
log PEt ‐1 -1.35** 0.09** -2.85*** 0.22*** 0.21*** -0.02 -2.80*** 0.15***
(-2.53) (2.25) (-5.36) (17.75) (5.28) (-0.64) (-5.33) (11.40)
log PEt ‐2 0.18* -0.01 -1.07*** 0.08*** -0.30 0.03 -1.17*** 0.06***
(1.71) (-0.31) (-7.6) (6.37) (-1.35) (0.89) (-6.36) (4.71)
log PEt ‐3 -0.71 0.05 -0.28*** 0.02 -0.23 0.02 -0.55*** 0.03**
(-0.05) (1.16) (-5.91) (1.56) (-0.22) (0.67) (-6.13) (2.17)
log PEt ‐4 0.61 -0.04 -0.33*** 0.02* 0.41 -0.05 0.09*** -0.01
(1.49) (-0.99) (-3.61) (1.88) (1.07) (-1.23) (5.22) (-0.44)
log PEt ‐5 -0.65 0.04 -1.60 0.12*** 0.07*** -0.01 -0.94 0.05***
(-0.45) (1.06) (-1.47) (9.95) (2.67) (-0.21) (-0.94) (3.99)
TVt 1 -1.27*** 0.08 18.37*** -1.43*** 0.07** -0.01*** 0.19 -0.01***
(-2.86) (0.09) (5.76) (-4.29) (2.18) (-3.53) (0.50) (-13.47)
RESt 1 -6.98** 0.45 -14.81*** 1.16*** -11.10** 1.25 -8.68*** 0.45

(-2.15) (0.52) (-15.25) (3.47) (-2.17) (0.15) (-4.78) (1.58)
OIBt -1 3.60*** -0.22 19.03*** -1.46*** 0.03** -0.00 -0.03*** 0.00
(4.2) (-0.26) (15.49) (-4.35) (2.22) (-1.05) (-3.22) (1.14)
OIBt -1 -4.54** 0.29 13.50*** -1.04*** 0.01 -0.00 -0.07*** 0.00**
(-2.33) (0.35) (6.25) (-3.14) (0.79) (-0.43) (-7.34) (2.63)
79
80
Table V (Continued)
EUR/USD USD/JPY
Mont 14.34 -0.91* 2.97 -0.23 -6.04* 0.66 -19.40* 1.00***
(0.91) (-1.69) (0.58) (-1.04) (-1.69) (0.95) (-1.95) (3.26)
Tuet 22.08** -1.40*** 8.83** -0.69*** -4.56 0.50 13.06 -0.68**
(2.26) (-2.66) (2.44) (-3.28) (-0.21) (0.76) (1.45) (-2.35)
Wedt 19.07** -1.21** 7.80** -0.61*** -9.32 1.01 12.91* -0.67**
(2.26) (-2.3) (2.63) (-2.87) (-0.02) (1.53) (1.76) (-2.31)
Thut 10.567 -0.671 8.705** -0.676*** -8.235 0.895 16.011** -0.829***
(0.84) (-1.31) (2.17) (-3.17) (-0.28) (1.39) (2.23) (-2.83)
DSTt 12.42 -0.79 -1.33 0.10 19.83 -2.16 4.45*** -0.23
(0.78) (-0.86) (-0.5) (0.29) (0.37) (-1.33) (3.33) (-1.11)
LNOt -3.34 0.21 -16.08*** 1.25*** -0.81 0.09 34.12*** -1.77***
(-0.92) (0.23) (-2.68) (3.56) (-0.98) (0.09) (3.23) (-3.91)
NYOt 7.19 -0.46 -9.76 0.76** 11.98*** -1.31 26.62*** -1.38***
(0.55) (-0.52) (-0.52) (2.25) (4.92) (-1.35) (6.78) (-3.07)
F-test 155.79 1.65 3725.37 175.44 17.62 0.59 1611.07 49.30
Adjusted R2 19.81 5.47 23.98 6.27 16.35 6.81 22.05 8.61
Log Likelihood 42.05 32080 490.54 335908 28.67 49735 414.89 632290
Number of 1094 1094 8554 8554 1094 1094 8554 8554
Observations
we infer that the European sovereign debt crisis does not strongly affect the
algorithmic traders’ trading strategies in the USD/JPY market.
C.4. Robustness Check with Higher Frequency Analysis

As algorithmic traders trade frequently and arbitrage in a million second, it
is essential to examine our results based on the AT and PE measures at a higher
frequency. We re-calculate AT, PE, trading volume, relative effective spread, and
order imbalance at the frequency of 10 minutes. The estimation results of SVAR
over year on the 10-min basis are reported in Table VI.
Panel A of Table VI displays the results for 2009, 2010, 2011, 2012, 2013, and
2014 (January to March) subsample periods, in the EUR/USD market. Still, we
find that PE is positively associated with contemporaneous AT but negatively
associated with the first lag of AT, suggesting that algorithmic traders actually
tend to enter the market as pricing error increases, and AT activities improve the
price efficiency in the subsequent 10-min interval. Similar empirical results
appear for 2010, 2011, 2012, 2013, and 2014 (January to March).
Although most control variables contain the same effects on PE, we find that
the order imbalances are negatively related with the PE in 2009. It implies that
information content contained in order flow can resolve the pricing error in
2009 and it is also the same in 2010 and 2011. But the effect disappears after 2011.
In the USD/JPY market, we find that PE positively associates with AT,
indicating that more algorithmic traders enter the market when the pricing error
is higher in the USD/JPY market, and AT activities are associated with a
subsequent increase in informational efficiency over time. The results for the
coefficients on control variables are consistent with those reported in previous
analysis, except for order imbalance. We find that the order imbalance is
positively correlated with pricing error in subsample periods of 2009, 2011, and
2014, consistent with the results based on hourly analysis. In the subsample
period of 2010, we also find that order imbalance decreases with pricing error,
which is consistent with the results of Table VI.
V. Conclusions
To study the relations between AT and pricing efficiency in the FX market,
we examine whether algorithmic trading affects the pricing efficiency that
reflects how information is incorporated into currency prices, using the SVAR
approach. Consistent with Chaboud et al. (2014), Hendershott, Jones, and
Menkveld (2011), and Viljoen, Westerholm, and Zheng (2014), our results show
that algorithmic traders are informed as AT is active, and algorithmic trading
activities enhance price discovery efficacy and improve informational efficiency.
82
Table VI
The Dynamic Relation between Algorithmic Trading (AT) and Pricing Error (PE) over Years (Based on
10-Minute Frequency)
This table reports the estimation results for subsample periods of 2009, 2010, 2011, 2012, 2013, and 2014 (January-March). The model is specified as follows:
5 5
ATt  c 1   j 1  j ATt  j  0 log PE t   j 1  j log PE t  j   1TVt 1  1RES t 1  1,OIBt1  1OIBt1
d 11Mont  d 21Tuet  d 31,Wedt  d 41Thut  a1DSTt  a2LNOt  a3NYOt   1,t ,
5 5
log PE t  c 2   j 1  j log PE t  j  0ATt  n 1 j ATt  j  2TVt 1  2RES t 1  2OIBt1  2OIBt1
d 12Mont  d 22Tuet  d 32Wedt  d 42Thut  b1DSTt  b2LNOt  b3NYOt   2,t ,
where AT is the proxy variable for algorithmic trading activity, log PE t denotes the logarithm pricing error and is the inverse measure of price efficiency. TV is the
trading volume, RES is the relative effective spread, OIB+ is the buy pressure, and OIB- is the sell pressure. Mon, Tue, Wed, and Thu are the dummy variables for
Monday, Tuesday, Wednesday and Thursday, respectively. Dummy variables for the implementation of daylight saving time (DST), the open of London market (LNO),
and the open of New York market (NYO) are considered in the model. The optimal length of lags is determined by the AIC criterion. The Newey-West robust t-values
(Newey and West (1987)) are reported in parentheses. *, **, and *** denote statistical significance at the 10%, 5% and 1% levels, respectively.
2009 2010 2011 2012 2013 2014

Panel A. EUR/USD
Constant -0.112*** -0.099*** -0.166 -0.038*** -1.118*** 1.140*** -0.063*** -0.139*** -0.217*** -0.103*** -0.342*** 0.013
(-30.9) (-12.44) (-32.21) (-8.44) (-16.4) (39.91) (-36.33) (-15.99) (-44.95) (-8.96) (-22.32) (0.33)
log PEt 0.084*** 0.198*** 0.011*** 0.052*** 0.045*** 0.067**
(20.21) (44.09) (342.3) (8.60) (7.10) (2.32)
ATt 0.468*** 0.142*** 0.873*** 0.615*** 0.56*** 0.489***

(32.76) (20.29) (63.94) (21.20) (18.98) (4.88)
ATt 1 0.355*** -0.211*** 0.247*** -0.136*** 0.736*** -0.553*** 0.433*** -0.329*** 0.268*** -0.279*** 0.188*** -0.26***
(24.03) (-10.03) (21.05) (-5.14) (26.18) (-14.99) (24.19) (-14.74) (11.17) (-12.88) (2.66) (-5.7)
ATt 2 0.128*** 0.001 0.128*** -0.001** 0.103*** 0.021 0.132*** -0.029 0.077*** -0.012 0.054*** -0.013
(19.22) (1.02) (19.24) (-2.37) (17.06) (0.84) (17.08) (-1.49) (9.78) (-0.61) (3.03) (-0.32)
Table VI (Continued)
2009 2010 2011 2012 2013 2014
Panel A. EUR/USD
ATt 3 0.087*** 0.004 0.088*** -0.012 0.081*** 0.022 0.079*** 0.005 0.06*** -0.010 0.025*** 0.092***
(13.33) (1.02) (12.99) (-0.51) (13.94) (0.84) (12.19) (0.63) (7.63) (-0.48) (4.48) (3.17)
ATt 4 0.063*** -0.007 0.061*** -0.01 0.048*** 0.026 0.077*** -0.01 0.067*** -0.006 0.043*** 0.022
(9.03) (-0.11) (9.00) (-0.25) (9.91) (0.98) (10.56) (-0.42) (9.06) (-0.17) (3.48) (0.84)
ATt 5 0.073*** 0.008 0.086*** -0.003 0.074*** 0.009 0.063*** 0.011 0.055*** 0.014 -0.004* 0.066**
(12.38) (1.33) (13.92) (-1.42) (12.33) (0.4) (10.98) (1.05) (9.09) (1.13) (-1.9) (2.29)
log PEt ‐1 -0.058*** 0.157*** -0.004 0.162*** -0.048*** 0.044*** -0.081 0.13*** -0.052** 0.106*** -0.046 0.108***
(-4.08) (23.87) (-4.61) (25.51) (-4.83) (5.63) (-0.32) (18.94) (-2.11) (14.45) (-0.88) (6.63)
log PEt ‐2 -0.052 0.115*** -0.021 0.101*** -0.021*** 0.015** -0.064** 0.094*** -0.042 0.073*** -0.037 0.076***
(-0.52) (17.57) (-1.77) (15.23) (-4.34) (2.20) (-2.10) (13.81) (-0.26) (10.14) (-0.03) (4.73)
log PEt ‐3 -0.04 0.074*** -0.004 0.082*** -0.032** 0.031*** -0.057 0.088*** -0.037*** 0.082*** -0.009 0.001
(-1.43) (11.21) (-1.88) (12.91) (-2.49) (4.57) (-1.06) (13.19) (-2.83) (11.61) (-1.09) (0.01)
log PEt ‐4 -0.031 0.068*** -0.008 0.067*** -0.034*** 0.031*** -0.056 0.084*** -0.034 0.065*** -0.010 0.046***
(-0.37) (10.51) (-0.47) (10.4) (-4.29) (4.49) (-1.45) (12.56) (-0.71) (9.23) (-1.56) (2.94)
log PEt ‐5 -0.029 0.062*** 0.0004** 0.060*** -0.014*** 0.009 -0.034 0.056*** -0.026*** 0.062*** -0.010*** 0.065***
(-0.06) (9.64) (2.22) (9.59) (-3.55) (1.26) (-0.15) (8.48) (-2.72) (8.94) (-2.82) (4.28)
TVt 1 3E-5*** -0.001*** 0.001 -0.0003*** 0.001*** -0.001*** 0.0004*** -0.001*** 0.00002*** -0.001*** 0.0001*** -0.001***
(-17.17) (-24.39) (-20.65) (-19.79) (19.63) (-29.32) (16.29) (-32.56) (-22.32) (-32.08) (-10.3) (-12.83)
RESt 1 -4.277 6.499 -0.932 1.546 -4.086 3.757 -6.062 3.14 -7.124* -0.698 -26.755*** -31.111
(-0.56) (1.64) (-0.25) (0.3) (-0.31) (0.38) (-1.58) (0.49) (-1.79) (-0.12) (-3.66) (-1.51)
OIBt -1 0.001* -0.001*** 0.0002 -0.001* 0.001*** -0.001 0.0001 -0.0002 0.0004 -0.0003 -0.0001 0.0001
(1.90) (-2.75) (0.88) (-1.91) (4.72) (-1.32) (1.02) (-0.04) (-1.08) (-1.21) (-0.01) (0.15)
OIBt -1 0.001 -0.001** 0.0001 -0.001** 0.002*** -0.002*** 0.0003 -0.0002 0.0001 0.001 -0.0002 0.001
(1.59) (-2.64) (0.29) (-2.19) (3.25) (-3.27) (0.97) (-0.91) (0.88) (0.02) (-0.22) (0.78)
Mont 0.001 -0.01** 0.001 -0.007 -0.006 0.008 -0.006 0.008 0.013* -0.013* 0.008 -0.005
(1.18) (-2.07) (0.15) (-1.32) (-0.54) (0.76) (-0.44) (1.28) (1.77) (-1.80) (0.73) (-0.31)
Tuet -0.003** -0.006 -0.003 -0.002 -0.002 -0.001 -0.004 0.0001 0.003 -0.009 0.007 -0.018
(-2.21) (-1.37) (-1.05) (-0.49) (-1.06) (-0.08) (-1.63) (0.03) (0.73) (-1.52) (0.19) (-1.25)
83
84
2009 2010 2011 2012 2013 2014
Panel A. EUR/USD
Wedt -0.003* -0.006 -0.001 -0.006 -0.009 0.005 -0.003 0.0005 0.005 -0.011* 0.008 -0.013
(-1.93) (-1.26) (-0.45) (-1.22) (-1.43) (0.54) (-1.29) (0.06) (0.43) (-1.73) (0.30) (-0.93)
Thut -0.001 -0.002 -0.001 -0.003 -0.003 -0.001 -0.001 0.001 0.010 -0.019*** 0.007 -0.016
(-0.83) (-0.5) (-0.57) (-0.69) (-1.36) (-0.06) (-0.17) (0.27) (0.14) (-3.12) (0.04) (-1.15)
DSTt -0.005 0.012*** 0.016*** -0.027*** 0.017*** -0.005 0.001*** -0.014*** 0.003 -0.001 -0.032** -0.019
(-0.25) (3.74) (5.86) (-7.59) (6.98) (-0.62) (4.23) (-3.49) (1.12) (-0.30) (-2.05) (-0.55)
LNOt 0.012 -0.045*** -0.007** -0.038*** 0.001** 0.012 0.024 -0.035*** 0.03 -0.057*** 0.033 -0.057**
(1.58) (-4.43) (-1.99) (-3.92) (2.27) (0.61) (0.43) (-3.2) (0.35) (-4.83) (0.44) (-2.26)
NYOt -0.036*** -0.013 -0.021*** -0.018** 0.086*** -0.114*** 0.010*** -0.046*** -0.007*** -0.052*** 0.028 -0.046*
(-7.06) (-1.58) (-3.62) (-2.2) (2.63) (-5.89) (3.82) (-4.29) (-6.34) (-4.49) (0.47) (-1.82)
F-test 457.66 144.53 592.09 80.77 1007.78 97.11 635.87 72.91 181.86 68.42 20.93 8.50
Adjusted R2 0.16 0.60 0.17 0.63 0.14 0.65 0.13 0.72 0.15 0.77 0.16 0.90
Log Likelihood 701.25 10518.39 836.09 11593.68 584.65 13371.05 451.09 13760.64 500.31 13757.54 125.30 3859.19
Number of 28835 28835 29386 29386 31652 31652 26896 26896 23146 23146 4828 4828
Observations
Panel B. USD/JPY
Constant -6.371*** 7.974*** 11.163*** -446.98*** -10.308*** 216.07*** -7.81*** 26.754*** -17.319*** 120.66*** -15.42*** 560.242***
(-4.06) (42.55) (8.20) (-46.02) (-6.57) (47.10) (-14.73) (43.81) (-22.65) (45.84) (-3.70) (22.46)
log PEt 1.070*** 40.139*** 20.863*** 3.231*** 6.885*** 36.248***
(19.8) (152.32) (54.98) (34.67) (185.34) (46.81)
ATt 0.000*** 0.000*** 0.000*** 0.000 0.000*** 0.000

(11.43) (85.36) (2.79) (0.17) (82.22) (0.05)
ATt 1 0.242*** -0.260*** 0.276*** -11.076*** 0.121*** -2.522*** 0.339*** -1.100*** 0.225*** -1.553*** 0.217*** -7.864***
(19.59) (-9.43) (22.39) (-12.39) (9.61) (-16.56) (32.5) (-8.78) (23.02) (-7.77) (9.56) (-7.24)
ATt 2 0.095*** -0.102 0.12*** -4.814 0.107*** -2.227** 0.097*** -0.312 0.067*** -0.461 0.064*** -2.321
(11.73) (-0.74) (14.78) (-0.22) (14.83) (-2.60) (13.17) (-0.12) (10.08) (-0.97) (3.84) (-1.03)
ATt 3 0.074*** -0.079 0.132*** -5.295 0.08*** -1.661 0.082*** -0.265 0.072*** -0.492 0.049*** -1.784
(9.12) (-0.43) (16.18) (-0.94) (11.04) (-0.05) (11.22) (-1.53) (10.81) (-0.77) (2.94) (-0.45)
2009 2010 2011 2012 2013 2014
Panel B. USD/JPY
ATt 4 0.076*** -0.081** 0.089*** -3.577 0.08*** -1.678 0.072*** -0.231 0.044*** -0.299* 0.032* -1.17
(9.38) (-2.41) (10.92) (-1.35) (11.18) (-0.69) (9.79) (-1.26) (6.57) (-1.79) (1.93) (-1.02)
ATt 5 0.059*** -0.063 0.114*** -4.57 0.081*** -1.681*** 0.085*** -0.274 0.067*** -0.461** 0.07*** -2.526
(7.44) (-0.22) (14.55) (-0.80) (11.32) (-2.82) (12.07) (-1.38) (10.54) (-2.00) (4.32) (-0.47)
log PEt ‐1 1.668*** -1.682*** 0.703 -28.104*** 2.318*** -48.196*** -0.025 0.131*** 0.243 -1.603*** 1.677 -60.729***
(3.36) (-11.82) (1.43) (-14.59) (4.16) (-21.01) (-0.23) (6.76) (1.51) (-10.67) (1.31) (-3.95)
log PEt ‐2 -1.633*** 1.801*** -2.813*** 112.974*** -0.784 16.426*** -0.335*** 1.104*** -0.197 1.416*** -1.588 57.622***
(-3.52) (6.73) (-6.02) (7.24) (-1.47) (9.54) (-3.12) (3.23) (-1.25) (9.23) (-1.35) (2.97)
log PEt ‐3 -1.638*** 1.803*** -3.991*** 160.23*** -1.483*** 30.994*** -0.135 0.471*** -0.49*** 3.419*** -2.638** 95.657*
(-3.59) (6.52) (-8.64) (5.87) (-2.81) (7.26) (-1.27) (4.73) (-3.13) (6.79) (-2.28) (1.94)
log PEt ‐4 -2.242*** 2.429*** -2.414*** 96.939*** -1.743*** 36.401*** -0.332*** 1.097*** -0.372** 2.59*** -0.377 13.678
(-4.94) (3.94) (-5.25) (4.78) (-3.32) (4.27) (-3.11) (3.64) (-2.37) (4.46) (-0.33) (1.36)
log PEt ‐5 -1.254*** 1.382*** -2.825*** 113.436*** -1.132** 23.665*** -0.257** 0.843** -0.312** 2.179*** -1.075 38.992
(-2.81) (5.28) (-6.27) (6.06) (-2.22) (5.72) (-2.42) (2.00) (-2.01) (4.59) (-0.95) (1.45)
TVt 1 -0.000*** -8.828*** -0.000*** -9.394*** -0.000*** -9.534*** 0.001 -30.190*** -0.000*** -16.389*** -0.000*** -9.36***
(-6.88) (-25.89) (-7.61) (-26.94) (-5.24) (-26.48) (0.06) (-21.86) (-12.26) (-25.90) (-4.83) (-15.98)
RESt 1 -0.186 0.196 -0.306 12.256*** -1.011*** 21.088*** -0.853*** 2.762 -0.748*** 5.145 -0.449 16.268
(-1.22) (1.06) (-1.23) (3.25) (-4.22) (2.96) (-3.81) (0.36) (-2.82) (0.35) (-1.03) (0.29)
OIBt -1 -0.035*** 0.037* 0.044*** -1.747 -0.042*** 0.874 0.032*** -0.104 0.009 -0.062 0.020 -0.740
(-3.00) (1.66) (3.30) (-1.01) (-2.69) (1.48) (2.71) (-1.10) (0.74) (-0.93) (0.64) (-1.43)
OIBt -1 -0.029** 0.031** 0.008 -0.302** -0.093*** 1.943* 0.025** -0.080 0.013 -0.086 -0.020 0.736**
(-2.61) (2.29) (0.63) (-2.44) (-6.64) (1.65) (2.23) (-0.73) (1.05) (-0.06) (-0.67) (2.59)
Mont 0.247 -0.26 0.471* -18.879*** 0.163 -3.397 0.268 -0.841 0.776*** -5.334 1.010 -36.599
(1.06) (-1.09) (1.87) (-3.40) (0.51) (-1.08) (1.16) (-1.52) (3.03) (-1.11) (1.55) (-0.03)
Tuet -0.205 0.216 -0.013 0.530 0.208 -4.334 0.352* -1.12 0.503** -3.473 0.416 -15.070
(-0.95) (0.86) (-0.06) (0.01) (0.70) (-0.17) (1.66) (-1.25) (2.19) (-1.09) (0.71) (-0.17)
Wedt 0.024 -0.025 -0.226 9.047 0.356 -7.435 0.042 -0.133 0.78*** -5.377 0.881 -31.907
(0.11) (-0.21) (-0.99) (0.82) (1.21) (-0.01) (0.2) (-0.21) (3.37) (-0.95) (1.51) (-0.90)
85
86
2009 2010 2011 2012 2013 2014
Panel B. USD/JPY
Thut 0.074 -0.077 -0.338 13.578 -0.183 3.820 0.0004 0.008 0.304 -2.109* 0.548 -19.865
(0.34) (-0.68) (-1.47) (1.6) (-0.61) (0.78) (0.00) (0.68) (1.33) (-1.89) (0.95) (-0.45)
DSTt -0.295** 0.327*** -1.821 73.086 1.714*** -35.784*** -0.332** 1.098** 0.114 -0.770* -3.162** 114.648
(-2.05) (4.79) (-11.07) (0.19) (8.25) (-10.21) (-2.09) (2.31) (0.74) (-1.81) (-2.11) (1.63)
LNOt 0.741* -0.813*** 0.363 -14.592 1.934*** -40.356 1.049*** -3.393 1.503*** -10.408*** 2.759** -99.993
(1.76) (-2.80) (0.84) (-0.94) (3.37) (-1.04) (2.6) (-0.18) (3.14) (-3.20) (2.23) (-0.04)
NYOt 0.642 -0.701* 1.071** -42.978 1.994*** -41.632*** 1.288*** -4.200 0.009 -0.140*** 1.023 -37.123**
(1.52) (-1.96) (2.49) (-0.81) (3.57) (-3.05) (3.21) (-1.44) (0.02) (-4.02) (0.92) (-2.53)
F-test 314.10 73.79 887.33 106.75 249.75 178.89 699.93 22.49 306.61 73.48 46.56 8.42
Adjusted R2 10.58 18.37 10.80 18.60 13.92 19.13 9.99 65.42 12.36 50.04 13.53 19.02
Log Likelihood 2547682 768.64 2475747 25356 4201615 739.52 2140480 9170.99 4142474 6783.90 941712 186.11
Number of 24538 24538 22991 22991 21713 21713 21453 21453 27119 27119 5168 5168
Observations
In the FX market, the limitation to access to the data with detailed

identification of AT, only few papers look into the relation between AT and
market quality. To our knowledge, there is only one article, Chaboud et al.
(2014), related to our study in the FX market. Compared to Chaboud et al.
(2014), we extend the analysis with a longer sample period and explore the
intraday pattern of algorithmic trading to obtain a deep understanding about
how algorithmic traders change their trading strategies over time. We find
evidence that algorithmic traders submit orders when the market is not active,
showing that AT can help increase the FX market liquidity. However, besides
being the suppliers of liquidity, algorithmic traders can trade with their
information advantage at times when the pricing error is high. Based on the
intraday analysis, we present that the algorithmic traders strategically change
their game plans across hours.
Chaboud et al. (2014) use the triangle arbitrage to study whether AT
improves the FX market efficiency. Different from their methodology, we not
only use currency returns but also include the order flows into our analysis of
price efficiency. We use the Hasbrouck (1993) approach to measure the pricing
error and analyze how intraday AT activities affect price efficiency to understand
the price discovery process by which new information is incorporated into
exchange rates. Overall, our results show that the efficiency-enhancing influence
of algorithmic traders affects price efficiency in the FX market, and provide a
comprehensive understanding about how algorithmic traders trade across
intraday intervals and affect the market quality.
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程式交易對於日內價格效率的影響：以外匯市場為例
吳震星*
中南財經政法大學金融學院
洪禎蔚**
中國信託商業銀行法人金融部門
高櫻芬***
國立中央大學財務金融學系
摘要
本文研究外匯市場中，程式交易對於市場日內資訊效率的影響。根據 Hasbrouck (1993) 的
模型，我們利用實際交易價格和訂單流量衡量每小時和每 10 分鐘的價格效率，並發現程式交
易活動與價格效率有顯著的反向關係，反映程式交易者會策略性地在價格效率較差的時候進入
市場。然而，在市場中的程式交易活動變熱絡後，下一期的價格效率會提高。
關鍵詞：程式交易、價格效率、價格偏誤、外匯市場、向量自我迴歸模型 (VAR)
* 通訊作者：吳震星，E-mail: loveaf1225@gmail.com，中南財經政法大學金融學院講師，430073 中國武

漢東湖高興區南湖大道 182 號。
** 洪禎蔚，中國信託商業銀行法人金融部門襄理。
*** 高櫻芬，國立中央大學財務金融學系教授。
作者感謝 EBS 公司所提供的外匯交易資料和陳業寧主編以及兩位匿名審稿人提供很多對於本文章修改有
幫助的建議。高櫻芬感謝科技部計畫的經費補助 (MOST104-2410-H-008-014-MY3)。

212 (FINAL) 財務金融學刊

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Journal of Financial Studies Vol. 28 No.

The Effect of Algorithmic Trading on Intraday

Yin-Feng Gau ***

* Corresponding author: Zhen-Xing Wu, E-mail: loveaf1225@gmail.com, Lecturer of School of Finance,

A. EBS Data of FX Trading

B.1. Algorithmic Trading (AT)

B.2. Measures of Price Efficiency

where is the difference in (log) prices , and is a column vector of

To make comparisons across intervals meaningful, σ s is normalized by the

As noted, PE is an inverse measure of price efficiency. We use the one-second

Figure 1. Daily Pricing Error (PE; Sample Period: January 1, 2009-

B.3. Measures of Trading Activities

Buy Pressure max 0, ,

III. Econometric Model

Figure 2. Daily Trading Volume (Sample Period: January 1, 2009-

Figure 4. Daily Order Imbalance (OIB; Sample Period: January 1,

λ1 ,OIBt ‐1 η1OIBt‐‐1 d 11Mont d 21Tuet d 31 ,Wedt d 41Thut ε 1,t , (10a)

λ2OIBt ‐1 η2OIBt‐‐1 d 12Mont d 22Tuet d 32Wedt d 42Thut ε 2,t , (10b)

IV. Empirical Results

A. Intraday Periodicity of AT, Trading Volume, and Pricing Error

Figure 5. Intraday Periodicity of Algorithmic Trading (AT) Measure and

Figure 6. Intraday Periodicity of Algorithmic Trading (AT) Measure

B. Relations between AT and Market Conditions

AT PE TV RES OIB + OIB -

AT PE TV RES OIB + OIB -

C. Structural Vector Autocorrelation (SVAR) Analysis

C.1. Algorithmic Trading and Pricing Error

The autoregressive structure of log PE also shows that price efficiency is

C.2. AT and Information Share

d 12Mon t d 22Tuet  d 32Wed t  d 42Thut  b1DSTt  b2LNOt  b3NYOt   2,t ,

Constant -1.174*** -1.934*** -0.788*** -2.801***

-0.017** -0.029 0.055*** 0.201*

C.3. Financial Crisis Effects

d 11Mont  d 21Tuet  d 31,Wedt  d 41Thut  a1DSTt  a2LNOt  a3NYOt   1,t ,

d 12Mont  d 22Tuet  d 32Wedt  d 42Thut  b1DSTt  b2LNOt  b3NYOt   2,t ,

RESt 1 -6.98** 0.45 -14.81*** 1.16*** -11.10** 1.25 -8.68*** 0.45

C.4. Robustness Check with Higher Frequency Analysis

d 11Mont  d 21Tuet  d 31,Wedt  d 41Thut  a1DSTt  a2LNOt  a3NYOt   1,t ,

d 12Mont  d 22Tuet  d 32Wedt  d 42Thut  b1DSTt  b2LNOt  b3NYOt   2,t ,

2009 2010 2011 2012 2013 2014

ATt 0.468*** 0.142*** 0.873*** 0.615*** 0.56*** 0.489***

ATt 0.000*** 0.000*** 0.000*** 0.000 0.000*** 0.000

In the FX market, the limitation to access to the data with detailed

Gau, Yin-Feng, and Zhen-Xing Wu, 2017, Macroeconomic announcements and

* 通訊作者：吳震星，E-mail: loveaf1225@gmail.com，中南財經政法大學金融學院講師，430073 中國武

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Constant -1.174* -1.934* -0.788* -2.801*

-0.017 -0.029 0.055* 0.201*

RESt 1 -6.98 0.45 -14.81* 1.16* -11.10 1.25 -8.68*** 0.45

ATt 0.468* 0.142* 0.873* 0.615* 0.56* 0.489*

ATt 0.000* 0.000* 0.000* 0.000 0.000* 0.000