Fast traders and slow price adjustments: an artificial market with strategic interaction and transaction costs

 

 

Speaker: Marco Tolotti, Università Ca' Foscari Venezia

 

Abstract: In this paper we propose an artificial market to model high frequency trading where (fast) agents strategically use thresholds rules to issue orders based on a signal on the level of stochastic liquidity prevailing on the market. A (slow) market maker is in charge to daily set the closing price and adjust transaction costs to control for the volatility of returns and market activity.

 

We first show that a baseline version of the model with no frictions is able to generate returns endowed with several stylized facts, thus suggesting that the two time-scales used in the model are one (and possibly novel) way to obtain realistic market outcomes and that high-frequency trading can amplify liquidity shocks. We then explore whether transaction costs can be used to control excess volatility and improve market quality. While properly imple- mented taxation schemes may help in reducing the volatility, care is needed to avoid to  excessively reduce activity in the market and intensify the occurence of abnormal peaks in returns.
 

 

A light lunch will be provided at 1p.m. Please RSVP for catering purposes to Mala Kapahi by 12 noon on Monday, 24th July.

 

Time: 12.00 – 1.00 p.m.

Venue: University of Technology, Sydney

           Building 8, Room 4.002 
           Dr Chau Chak Wing Building

           14 - 28 Ultimo Road, Ultimo

 

 

Enquiries: Mala Kapahi (Ph: +61 2 9514 7777)