IDEAS home Printed from https://ideas.repec.org/p/gre/wpaper/2018-31.html
   My bibliography  Save this paper

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

Author

Listed:
  • Sandrine Jacob Leal

    (ICN Business School, France
    Université de Lorraine
    CEREFIGE)

  • Nobuyuki Hanaki

    (Université Côte d'Azur
    CNRS, GREDEG
    IUF)

Abstract

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
    as

    Download full text from publisher

    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2018-31.pdf
    File Function: First version
    Download Restriction: no

    More about this item

    Keywords

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:gre:wpaper:2018-31. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patrice Bougette). General contact details of provider: http://edirc.repec.org/data/credcfr.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.