IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/17606.html
   My bibliography  Save this paper

Algorithmic Pricing and Liquidity in Securities Markets

Author

Listed:
  • Colliard, Jean-Edouard
  • Foucault, Thierry
  • Lovo, Stefano

Abstract

We let “Algorithmic Market-Makers†(AMMs), using Q-learning algorithms, choose prices for a risky asset when their clients are privately informed about the asset payoff. We find that AMMs learn to cope with adverse selection and to update their prices after observing trades, as predicted by economic theory. However, in contrast to theory, AMMs charge a mark-up over the competitive price, which declines with the number of AMMs. Interestingly, markups tend to decrease with AMMs’ exposure to adverse selection. Accordingly, the sensitivity of quotes to trades is stronger than that predicted by theory and AMMs’ quotes become less competitive over time as asymmetric information declines.

Suggested Citation

  • Colliard, Jean-Edouard & Foucault, Thierry & Lovo, Stefano, 2022. "Algorithmic Pricing and Liquidity in Securities Markets," CEPR Discussion Papers 17606, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:17606
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP17606
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Umut Cetin & Kasper Larsen, 2023. "Is Kyle's equilibrium model stable?," Papers 2307.09392, arXiv.org, revised Jul 2023.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:17606. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.