Does Algorithmic Trading Affect Analyst Research Production?

35 Pages Posted: 4 Jun 2020

See all articles by Pawel Bilinski

Pawel Bilinski

City University London - Sir John Cass Business School

Irene Karamanou

University of Cyprus - Department of Public and Business Administration

Anastasia Kopita

University of Warwick - Warwick Business School

Marios A. Panayides

University of Cyprus - Department of Accounting and Finance; University of Pittsburgh - Katz Graduate School of Business

Date Written: May 10, 2020

Abstract

We document that Algorithmic Traders (ATs) reduce analysts’ stock coverage and the number of analyst research reports. This evidence reflects that ATs pre-empt trades on new information, which reduces non-AT investment-driven demand for analyst research. Consistently, the effects we document dominate (i) when analysts produce new information rather than simply disseminate public information; (ii) when there are more institutional investors demanding research for trading purposes rather than for monitoring purposes; (iii) for stock recommendations rather than earnings forecasts (as the latter also serve a monitoring purpose); (iv) when stock liquidity is higher, as ATs require high liquidity for profitable trades; (v) for smaller stocks where the analyst’s reputational cost of dropping coverage is lower. We address endogeneity using firm-fixed effects, regressions in changes, and using a natural experiment based on the tick-size pilot programme. Overall, our results suggest that an unintended consequence of algorithmic trading is lower analyst research production.

Keywords: algorithmic trading; analyst coverage; earnings forecasts; stock recommendations

JEL Classification: D53; G12; G14; M41

Suggested Citation

Bilinski, Pawel and Karamanou, Irene and Kopita, Anastasia and Panayides, Marios A., Does Algorithmic Trading Affect Analyst Research Production? (May 10, 2020). Available at SSRN: https://ssrn.com/abstract=3597356 or http://dx.doi.org/10.2139/ssrn.3597356

Pawel Bilinski (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Irene Karamanou

University of Cyprus - Department of Public and Business Administration ( email )

1 Panepistimiou Ave.
Nicosia CY-2109
Cyprus
+357 22 893608 (Phone)
+357 22 895475 (Fax)

Anastasia Kopita

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Marios A. Panayides

University of Cyprus - Department of Accounting and Finance ( email )

University of Cyprus
P.O. Box 20537
Nicosia, CY-1678
Cyprus

University of Pittsburgh - Katz Graduate School of Business ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

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