Algorithmic Trading and Mutual Fund Performance

We examine the effect of algorithmic trading (AT) on the US mutual fund performance and find that funds holding stocks with higher AT intensity have lower holdings return and higher interim trading profits as measured by return gap. This positive effect of AT on return gap survives controls of known factors of fund returns as well as liquidity variables such as effective spread and execution shortfall. Our results suggest that the effect of AT on fund returns is via the trading channel and the largest AT benefit is in non-index funds. Using exchange automation as instrument of exogenous change in AT, we find the positive effect of AT on return gap to be causal