Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading

Giorgio Fagiolo (), Sandrine Jacob Leal, Mauro Napoletano and Andrea Roventini
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Sandrine Jacob Leal: GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur

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Abstract: We build an agent-based model to study how the interplay between low- and high-frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading exacerbates market volatility and generates flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. By contrast, high-frequency traders activation is event-driven and depends on price fluctuations. High-frequency traders use directional strategies to exploit market information produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we find that the presence of high-frequency traders increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by two salient characteristics of high-frequency traders, i.e., their ability to i. generate high bid-ask spreads and ii. synchronize on the sell side of the limit order book. Finally, we find that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.

Keywords: Agent-based models; Limit order book; High-frequency trading; Low-frequency trading (search for similar items in EconPapers)
Date: 2015-08
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Published in Journal of Evolutionary Economics, 2015, 26 (1), pp.49 - 76. ⟨10.1007/s00191-015-0418-4⟩

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Related works:
Journal Article: Rock around the clock: An agent-based model of low- and high-frequency trading (2016)
Working Paper: Rock around the Clock: An agent-based model of low- and high-frequency trading (2016)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2015)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
Working Paper: Rock around the clock:An agent-based model of low-and high frequency trading (2014)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
Working Paper: Rock around the clock: An agent-based model of low- and high-frequency trading (2014)
Working Paper: Rock around the clock: an agent-based model of low- and high-frequency trading (2014)
Working Paper: Rock around the clock: an agent-based model of low- and high-frequency trading (2014)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03411703

DOI: 10.1007/s00191-015-0418-4

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