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Machines and Markets : Assessing the Impact of Algorithmic Trading on Financial Market Efficiency

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  • Garg, Karan

    (University of Warwick)

Abstract

The rise of machine learning has revolutionised finance. Institutions across the world have increasingly turned to data science and machine learning to create trading models without the need for human intervention. This has had various implications for the financial markets that they operate in, including market efficiency. This paper simulates a financial market with agent-based modelling and Monte-Carlo style simulations, to motivate a qualitative discussion about the implications of increased algorithmic trading on financial market efficiency. It finds that algorithmic traders (ATs) can seemingly increase market efficiency through better liquidity management and more complete extraction of information from prices. However, this also comes with increased instability and potential convergence to an unstable equilibrium. The Adaptive Market Hypothesis (Lo, 2004) is suggested as an alternative framework for analysing AT behaviour.

Suggested Citation

  • Garg, Karan, 2021. "Machines and Markets : Assessing the Impact of Algorithmic Trading on Financial Market Efficiency," Warwick-Monash Economics Student Papers 11, Warwick Monash Economics Student Papers.
    • Handle: RePEc:wrk:wrkesp:11
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/wmesp/manage/11_-_karan_garg.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Neural Networks ; Agent-Based Modelling ; Efficient Market Hypothesis ; Stock Market Simulation ; Financial Regulation JEL Classification: C45 ; C53 ; G14 ; G17 ; G18;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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