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Rule-based trading on an order-driven exchange: a reassessment

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  • Alan G. Isaac
  • Vasudeva Ramaswamy

Abstract

A core research area of computational behavioral finance investigates emergent price dynamics when heterogeneous traders follow a mix of rule-based strategies and interact indirectly through a limit order book. This paper offers a detailed specification of such a model in order to raise questions about some previous findings. The questions force a comprehensive reconsideration of the price dynamics of a well-known model. This leads to a surprising clarification of the contributions of various trading strategies to market outcomes: a popular characterization of chartism proves largely irrelevant for price dynamics. We also shed new light on the volume-volatility relationship, and provide improved visualizations to expose market behavior.

Suggested Citation

  • Alan G. Isaac & Vasudeva Ramaswamy, 2023. "Rule-based trading on an order-driven exchange: a reassessment," Quantitative Finance, Taylor & Francis Journals, vol. 23(12), pages 1871-1886, November.
    • Handle: RePEc:taf:quantf:v:23:y:2023:i:12:p:1871-1886
    DOI: 10.1080/14697688.2023.2270711
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