Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach

Brice Corgnet, Mark DeSantis () and Christoph Siemroth
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Mark DeSantis: Chapman University, Argyros School of Business and Economics; Economic Science Institute, One University Drive, Orange, CA 92866, USA

No 2313, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: We develop a novel experimental paradigm to study the causal impact of two classes of trading algorithms on price efficiency, trading volume, liquidity, and welfare. In our design, public information about the asset value is revealed during trading, which gives algorithms a reaction speed advantage. We distinguish market-order (aggressive) and limit-order (passive) algorithms, which replace human traders from the baseline markets. Relative to human-only markets, limit-order algorithms improve welfare, although human traders do not benefit, as the surplus is captured by the algorithms. Market-order algorithms do not change welfare, though they do lower human traders’ profits. Both types of algorithms improve price efficiency, lower volatility, and increase the share of profits for unsophisticated human traders. Our results offer unique evidence that non-exploitative algorithms can enhance welfare and be beneficial to unsophisticated traders.

Keywords: Algorithmic Trading; Experimental Markets; High-Frequency Trading; Price Efficiency; News Announcements; Welfare (search for similar items in EconPapers)
JEL-codes: C92 D61 G12 G14 G41 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-des and nep-exp
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Related works:
Working Paper: Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach (2024)
Working Paper: Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach (2023)
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