The effect of algorithmic and high frequency trading on liquidity and volatility: The case of BIST-30

While "algorithmic" and "high-frequency" tradings have been used in the stock markets of developed countries such as the United States, where capital markets are developed, since the early 2000s, they have recently begun to be used in emerging markets, including Turkey. Although there are no firms that directly engage in High Frequency Trading (HFT) in Turkey, HFT trandings can be made through intermediary institutions. In this study, the effect of High Frequency Tradings, which started to be used in Borsa Istanbul, which is one of the emerging markets, since November 2015, on the liquidity and volatility of the stocks in BIST-30 is investigated. The analysis period of the study is between January 2, 2016 and December 31, 2020. The most important factor in the selection of this period was Borsa İstanbul's started to use the "BISTTECH" technological infrastructure as a result of the agreement made with NASDAQ on November 30, 2015. The sample is limited to BIST-30, which consists of 30 relatively high trading volume stocks. The reason of focusing on BIST-30 in the study is to determine that HFT activities are concentrated in stocks with high trading volume as a result of examining the studies in the literature. In order to test the validity of the results in different period intervals, a separate analysis was made for both periods as the pre-pandemic period, the pandemic period and the rise-fall periods of the market. It is carried out to determine how the effect of HFT on liquidity and volatility changes during the falling and rising periods of the market. For the aforementioned analysis, the period when "market return (BIST-30) < 0" was taken as a fall period, and the period when "market return (BIST-30) > 0" was taken as the rise period. The Driscoll and Kraay fixed effect panel regression model was used as an econometric technique. As a result of the analyses, it has been determined that the increase in high-frequency trading has increased the liquidity and volatility of the stocks included in BIST-30. In addition, while the results before the pandemic period and the rise period are similar, the effect of high-frequency trading on liquidity disappears during the pandemic period.