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Assessing the impact of algorithmic trading on markets: A simulation approach

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  • Gsell, Markus
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    Abstract

    Innovative automated execution strategies like Algorithmic Trading gain significant market share on electronic market venues worldwide, although their impact on market outcome has not been investigated in depth yet. In order to assess the impact of such concepts, e.g. effects on the price formation or the volatility of prices, a simulation environment is presented that provides stylized implementations of algorithmic trading behavior and allows for modeling latency. As simulations allow for reproducing exactly the same basic situation, an assessment of the impact of algorithmic trading models can be conducted by comparing different simulation runs including and excluding a trader constituting an algorithmic trading model in its trading behavior. By this means the impact of Algorithmic Trading on different characteristics of market outcome can be assessed. The results indicate that large volumes to execute by the algorithmic trader have an increasing impact on market prices. On the other hand, lower latency appears to lower market volatility. --

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    File URL: http://econstor.eu/bitstream/10419/43250/1/606199632.pdf
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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/49.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cfswop:200849

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    Related research

    Keywords: Algorithmic Trading; Simulation; Double Auction;

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    References

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    1. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    2. Konishi, Hizuru, 2002. "Optimal slice of a VWAP trade," Journal of Financial Markets, Elsevier, Elsevier, vol. 5(2), pages 197-221, April.
    3. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(3), pages 205-258, August.
    4. Raberto, Marco & Cincotti, Silvano & Focardi, Sergio M. & Marchesi, Michele, 2001. "Agent-based simulation of a financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 299(1), pages 319-327.
    5. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 153-81, March.
    6. Carl Chiarella & Giulia Iori, 2002. "A simulation analysis of the microstructure of double auction markets," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 2(5), pages 346-353.
    7. Johannes Prix & Otto Loistl & Michael Huetl, 2007. "Algorithmic Trading Patterns in Xetra Orders," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(8), pages 717-739.
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    Cited by:
    1. Iori, G. & Porter, J., 2012. "Agent-Based Modelling for Financial Markets," Working Papers, Department of Economics, City University London 12/08, Department of Economics, City University London.

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