Algorithmic Trading and Liquidity Commonality

Although previous research has documented a low intraday liquidity commonality across stocks, it has grown over the past decade. Using the introduction of hybrid market in the New York Stock Exchange, I show that at least a part of this growth can be attributed to an increase in algorithmic trading; hybridization increases the 5-minute liquidity comovement by 30 to 50%. Moreover, the effect is stronger at daily frequencies: hybridization induces a 90% higher daily liquidity co-movement. These results are due to both an increase in market liquidity risk and a decrease in idiosyncratic liquidity volatility