The High-Frequency Algorithmic Trading Method
In recent years, with advances in technology, new trading methods that use electronic trading platforms have been developed for automatic trading without human intervention. These automatic trading methods have changed the face of trading, and have a marked effect on how trading is done and on the type of traders participating in the market.
High frequency trading is the most popular method in the area of algorithmic trading; those using this method contribute about half of trading volume in the US, and about 40 percent of trading volume in Europe. Studies done abroad show that this method greatly enhances the level of liquidity, mainly by increasing the Bid-Ask spreads. With that, this method also has its disadvantages, which negatively impact the markets and the traders who operate with traditional methods.
This work examines how the entry of algorithmic traders to the Israeli corporate bond market affects the level of liquidity in the market, and whether that effect is similar to the effect found abroad. A review of the Israeli market shows that the Tel Aviv Stock Exchange features quite broad activity on the part of algorithmic traders, which is mainly focused on options trading on the Tel Aviv 25 index. These traders then began operating in corporate bonds as well, thereby leading to a sharp increase in the number of quotes fed to the Stock Exchange, but not leading to a parallel improvement in the level of liquidity. This finding is not consistent with similar findings abroad, where the entry of high frequency traders significantly improved the level of liquidity in the market.