Humans in charge of trading robots: the first experiment

Elena Asparouhova, Peter Bossaerts, Xiaoqin Cai, Kristian Rotaru, Nitin Yadav and Wenhao Yang

Review of Finance, 2024, vol. 28, issue 4, 1215-1244

Abstract: We present results from an experiment where participants have access to automated trading algorithms, which they may deploy at will while still trading manually. Treatments differ in whether robots must not be halted, deployment is compulsory, or robots can be halted and replaced at will. We hypothesize that robot trading would reduce mispricing, and that the effect would be more pronounced as commitment degree increases. Yet, compared to manual trading only, we observe equally large and frequent mispricing and, in early trading, significantly higher bid–ask spreads and more frequent flash crashes/price surges. Participants earn more, provided they combine robot and manual trading. Compared to evidence from archival data, we find significantly higher use of liquidity-taking robots. We attribute this to the inability, in the field, to identify the presence of liquidity takers when they happen not to trade.

Keywords: algorithmic trading; robot-human interaction; robot trading; financial market bubbles; experimental finance (search for similar items in EconPapers)
JEL-codes: C92 G12 G41 (search for similar items in EconPapers)
Date: 2024
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