Algorithmic Trading in Turbulent Markets

We investigate the role algorithmic trading (AT) on days when the absolute value of the market return is more than two percent. We find that the abnormal return of a stock is related to the stock's AT intensity, that high AT intensity stocks experience less price drops (surges) on days when the market declines (increases) for more than two percent. This result is consistent with the view that AT minimizes price pressures and mitigates transitory pricing errors. Further analyses confirm that AT order imbalances have a smaller price impact compared to non-AT order imbalances and algorithmic traders reduce their price pressure by executing their trades according to the volume-weighted average prices