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Market Behavior Under Zero-Intelligence Trading and Price Awareness

In: Complexity and Artificial Markets

Author

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  • Lucia Milone

    (University of Venice)

Abstract

This paper studies the consequences on market performance of different behavioral assumptions about agents’ trading strategies (pure zero-intelligence, nice behavior and greedy behavior) and of pre-trade quote disclosure (price awareness). The investigation is conducted according to different criteria, such as efficiency, volume and price dispersion. We can summarize the main results as follow. Nice behavior performs better than greedy behavior with respect to all the performance criteria. Information disclosure increases allocative efficiency under the assumption of nice behavior but is not enough to achieve the same result with greedy traders. In fact, greedy traders perform better in the closed-book scenario in terms both of allocative efficiency and transaction volume. Furthermore, nice traders leads to the same volume of transaction in the open- and in the closed-book scenario, despite to a higher level of allocative efficiency in the former than in the latter; this can be explained (at least partially) by the lower number of intermarginal buyers and sellers that fail to trade under information disclosure. Pure zero-intelligent traders are usually overperformed by both the other kind of agents and both in the open- and in the closed-book scenario.

Suggested Citation

  • Lucia Milone, 2008. "Market Behavior Under Zero-Intelligence Trading and Price Awareness," Lecture Notes in Economics and Mathematical Systems, in: Klaus Schredelseker & Florian Hauser (ed.), Complexity and Artificial Markets, chapter 3, pages 27-37, Springer.
    • Handle: RePEc:spr:lnechp:978-3-540-70556-7_3
    DOI: 10.1007/978-3-540-70556-7_3
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