Algorithmic Trading, What if It is Just an Illusion? Evidence from Experimental Financial Markets

Sandrine Jacob Leal and Nobuyuki Hanaki
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Sandrine Jacob Leal: ICN Business School, France

No 2018-31, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: This work investigates whether and how the potential presence of algorithmic trading in financial markets can influence humans' trading activities, and ultimately price dynamics and market liquidity. We consider two different types of trading strategies commonly employed by high-frequency traders, spoofing and market making. The former has been associated with market manipulation, and the latter is often seen as providing liquidity to markets. We run artificial trading experiments to examine the effect of their potential presence. From these experiments, we find that the potential presence of algorithmic trading induces (1) larger initial price forecasts deviations from the fundamental value, (2) more volatile forecasted prices, and (3) delayed initial orders.

Keywords: Market volatility; Market efficiency; Computer traders; Experiments; Asset markets (search for similar items in EconPapers)
JEL-codes: C90 D84 G01 G14 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-11, Revised 2020-01
New Economics Papers: this item is included in nep-exp and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:gre:wpaper:2018-31

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