Algorithmic Trading and Spread Dynamics: A Review of Current Literature

Author(s)	Ms. KARISHMA YADAV, Mr. INDRESH PRATAP SINGH, Nishant Kumar
Country	India
Abstract	Algorithmic trading has increased sharply over the last decade. This review highlights how algorithmic trading shapes spread dynamics, liquidity, and market stability across global markets. Reviewing 50 multidisciplinary studies, finds that high frequency and algorithmic strategies typically narrow bid–ask spreads and improve liquidity under normal conditions but can increase volatility and trigger liquidity withdrawals during market stress, with these effects more pronounced in technologically advanced markets. The systematic analysis also compares market impact modelling approaches and shows that AI-enabled execution models enhance efficiency while requiring careful oversight. Regulatory frameworks help mitigate systemic risks yet struggle to keep pace with rapid technological change, especially in emerging markets. These findings underline the dual role of algorithmic trading in improving market quality and presenting vulnerabilities, highlighting the need for adaptive regulation.
Keywords	Algorithmic trading, spread dynamics, Bid- ask spread, Liquidity, High- frequency Trading.
Field	Business Administration
Published In	Volume 7, Issue 1, January-February 2026
Published On	2026-02-28

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