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Arbitrage bots in experimental asset markets

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  • Angerer, Martin
  • Neugebauer, Tibor
  • Shachat, Jason

Abstract

Trading algorithms are an integral component of modern asset markets. In twin experimental markets for long-lived correlated assets we examine the impact of alternative types of arbitrage-seeking algorithms. These arbitrage robot traders vary in their latency and whether they make or take market liquidity. All arbitrage robot traders we examine generate greater conformity to the law-of-one-price across the twin markets. However, only the liquidity providing arbitrage robot trader moves prices into closer alignment with fundamental values. The reduced mispricing comes with varying social costs; arbitrage robot traders’ gains reduce the earnings of human traders. We identify factors which drive differences in human trader performance and find that the presence of an arbitrage robot trader has no disproportionate effect with respect to these factors on subjects’ earnings.

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  • Angerer, Martin & Neugebauer, Tibor & Shachat, Jason, 2023. "Arbitrage bots in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 206(C), pages 262-278.
    • Handle: RePEc:eee:jeborg:v:206:y:2023:i:c:p:262-278
    DOI: 10.1016/j.jebo.2022.12.004
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    Cited by:

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    2. Brice Corgnet & Mark DeSantis & Christoph Siemroth, 2023. "Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach," Working Papers 2313, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    3. Lambrecht, Marco & Sofianos, Andis & Xu, Yilong, 2021. "Does mining fuel bubbles? An experimental study on cryptocurrency markets," Working Papers 0703, University of Heidelberg, Department of Economics.
    4. Arturo Macias, 2022. "Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1418-1440, November.

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    More about this item

    Keywords

    Asset market experiment; Arbitrage; Algorithmic trading;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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