Rock around the Clock: An agent-based model of low- and high-frequency trading

Sandrine Jacob Leal (sandrine.jacob-leal@icn-artem.com), Mauro Napoletano, Andrea Roventini and Giorgio Fagiolo (giorgio.fagiolo@santannapisa.it)
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Sandrine Jacob Leal: ICN Business School, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine

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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; ·; Flash; crashes; ·; Market; volatility (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (35)

Published in Journal of Evolutionary Economics, 2016, 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 (2015)
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:journl:hal-01512863

DOI: 10.1007/s00191-015-0418-4

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