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Algorithmic Trading, What if It is Just an Illusion? Evidence from Experimental Financial Markets


  • Sandrine Jacob Leal

    (ICN Business School, France
    Université de Lorraine

  • Nobuyuki Hanaki

    (Université Côte d'Azur


This work investigates whether the perception of algorithmic trading (AT) and their potential presence in financial markets by human traders change their price forecasts, trading activities, and ultimately market dynamics. We consider two different types of trading strategies commonly employed by high-frequency traders, layering/spoofing and market making. The former has been associated with market manipulation, and the latter is often seen as providing liquidity to markets. We run artificial trading experiments to examine the effect of their potential presence. From these experiments, we find that (1) the potential presence of AT induces larger initial price forecasts deviations from the fundamental value, (2) the differences in perception of AT have an impact on subjects' initial bids, and (3) the potential presence of AT seems to slow down the convergence of market prices to fundamental value.

Suggested Citation

  • Sandrine Jacob Leal & Nobuyuki Hanaki, 2018. "Algorithmic Trading, What if It is Just an Illusion? Evidence from Experimental Financial Markets," GREDEG Working Papers 2018-31, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2018-31

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    Market volatility; Market efficiency; Computer traders; Experiments; Asset markets;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G01 - Financial Economics - - General - - - Financial Crises

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