Does the increased prevalence of algorithmic trading (AT) produce real economic effects? We find that AT contributes to managerial learning by fostering the production of new information and thereby increases firms’ investment-to-price sensitivity. We link AT’s impact on the investment-to-price sensitivity to the revelatory price efficiency — extent to which stock prices reveal information for real efficiency. AT-driven investment-to-price sensitivity helps managers make better investment decisions, leading to improved firm performance. While in aggregate AT contributes positively to managerial learning, we also show that there is a subset of AT strategies, namely opportunistic AT that is harmful to managerial learning.
Systemic Risk Centre Discussion Papers DP 122
Financial Markets Group Discussion Papers DP 861