Modelling complex financial markets using real-time human-agent trading experiments

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Abstract

To understand the impact of high frequency trading (HFT) systems on financial market dynamics, a series of controlled real-time experiments involving humans and automated trading agents were performed. These experiments fall at the interdisciplinary boundary between the more traditional fields of behavioural economics (human-only experiments) and agent based computational economics (agent-only simulations). Experimental results demonstrate that: (a) faster financial trading agents can reduce market efficiency - a worrying result given the race towards zero-latency (ever faster trading) observed in real markets; and (b) faster agents can lead to market fragmentation, such that markets transition from a regime where humans and agents freely interact, to a regime where agents are more likely to trade between themselves - a result that has also been observed in real financial markets.

It is also shown that (c) realism in experimental design can significantly alter market dynamics - suggesting that, if we want to understand complexity in real financial markets, it is finally time to move away from the simple experimental economics models first introduced in the 1960s.
Original languageEnglish
Title of host publicationComplex Systems Modeling and Simulation in Economics and Finance
EditorsShu-Heng Chen, Ying-Fang Kao, Ragupathy Venkatachalam, Ye-Rong Du
PublisherSpringer International Publishing AG
Pages35-69
Number of pages34
ISBN (Electronic)9783319996240
ISBN (Print)9783319996226
DOIs
Publication statusPublished - 21 Nov 2018
EventConference on Computing in Economics and Finance - Howard Civil Service International House, Taipei, Taiwan
Duration: 20 Jun 201522 Jun 2015
Conference number: 21
http://www.aiecon.org/conference/cef2015/

Publication series

NameSpringer Proceedings in Complexity
PublisherSpringer International Publishing
ISSN (Print)2213-8684

Conference

ConferenceConference on Computing in Economics and Finance
Abbreviated titleCEF2015
CountryTaiwan
CityTaipei
Period20/06/1522/06/15
Internet address

Keywords

  • Agent-based Computational Economics
  • Automated Trading
  • Continuous Double Auction
  • Experimental Economics
  • High-Frequency Trading
  • Human-Agent Experiments
  • Robot Phase Transition
  • Trading Agents

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  • Cite this

    Cartlidge, J., & Cliff, D. (2018). Modelling complex financial markets using real-time human-agent trading experiments. In S-H. Chen, Y-F. Kao, R. Venkatachalam, & Y-R. Du (Eds.), Complex Systems Modeling and Simulation in Economics and Finance (pp. 35-69). (Springer Proceedings in Complexity). Springer International Publishing AG. https://doi.org/10.1007/978-3-319-99624-0_3