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High frequency trading strategies, market fragility and price spikes: an agent based model perspective

High frequency trading strategies, market fragility and price spikes: an agent based model perspective
High frequency trading strategies, market fragility and price spikes: an agent based model perspective
Given recent requirements for ensuring the robustness of algorithmic trading strategies laid out in the Markets in Financial Instruments Directive II (MiFID II), this paper proposes a novel agent-based simulation for exploring algorithmic trading strategies. Five different types of agents are present in the market. The statistical properties of the simulated market are compared with equity market depth data from the Chi-X exchange and found to be significantly similar. The model is able to reproduce a number of stylised market properties including: clustered volatility, autocorrelation of returns, long memory in order flow, concave price impact and the presence of extreme price events. The results are found to be insensitive to reasonable parameter variations.
Agent-based model, MIFiD II, Limit order book, Stylised facts, Algorithmic trading
McGroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Booth, Ash
e23d78c8-4b8c-421c-962f-b875136b8e25
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Chinthalapati, V.L. Raju
65ec749f-9695-4550-a408-93c649f807af
McGroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Booth, Ash
e23d78c8-4b8c-421c-962f-b875136b8e25
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Chinthalapati, V.L. Raju
65ec749f-9695-4550-a408-93c649f807af

McGroarty, Frank, Booth, Ash, Gerding, Enrico and Chinthalapati, V.L. Raju (2018) High frequency trading strategies, market fragility and price spikes: an agent based model perspective. Annals of Operations Research. (doi:10.1007/s10479-018-3019-4).

Record type: Article

Abstract

Given recent requirements for ensuring the robustness of algorithmic trading strategies laid out in the Markets in Financial Instruments Directive II (MiFID II), this paper proposes a novel agent-based simulation for exploring algorithmic trading strategies. Five different types of agents are present in the market. The statistical properties of the simulated market are compared with equity market depth data from the Chi-X exchange and found to be significantly similar. The model is able to reproduce a number of stylised market properties including: clustered volatility, autocorrelation of returns, long memory in order flow, concave price impact and the presence of extreme price events. The results are found to be insensitive to reasonable parameter variations.

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Accepted/In Press date: 14 August 2018
e-pub ahead of print date: 25 August 2018
Published date: 2018
Keywords: Agent-based model, MIFiD II, Limit order book, Stylised facts, Algorithmic trading

Identifiers

Local EPrints ID: 423233
URI: http://eprints.soton.ac.uk/id/eprint/423233
PURE UUID: f32d6ab4-9d13-4dca-bfef-55177babecbd
ORCID for Frank McGroarty: ORCID iD orcid.org/0000-0003-2962-0927
ORCID for Enrico Gerding: ORCID iD orcid.org/0000-0001-7200-552X

Catalogue record

Date deposited: 19 Sep 2018 16:30
Last modified: 17 Dec 2019 05:15

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