Algorithmic Trading and Mutual Fund Performance

Joey Yang, Jerry Parwada, Kingsley Fong

Research output: Contribution to conferenceConference presentation/ephemera

Abstract

We examine the effects of algorithmic trading (AT) on the US mutual fund industry and find that funds holding stocks with higher AT intensity have lower holdings return and higher interim trading profits (return gap). This effect survives controls of effective spread and execution shortfall. Our results suggest that AT’s effect on funds is via the trading channel rather than funds’ stock selection abilities. AT’s positive effects of enhanced market quality on fund performance dominates its negative influence of predatory trading. Using exchange automation as an instrument, we find evidence suggesting the effect of AT on return gap is causal.
Original languageEnglish
Number of pages42
Publication statusUnpublished - 28 Jun 2018

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