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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

    (Institute of Social and Economic Research
    Osaka University, Japan)

Abstract

This work investigates whether and how the potential presence of algorithmic trading in financial markets can influence humans' trading activities, and ultimately price dynamics and market liquidity. We consider two different types of trading strategies commonly employed by high-frequency traders, 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 the potential presence of algorithmic trading induces (1) larger initial price forecasts deviations from the fundamental value, (2) more volatile forecasted prices, and (3) delayed initial orders.

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), Université Côte d'Azur, France, revised Jan 2020.
    • Handle: RePEc:gre:wpaper:2018-31
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    File Function: Revised version, 2020-01
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    More about this item

    Keywords

    Market volatility; Market efficiency; Computer traders; Experiments; Asset markets;
    All these keywords.

    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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