IDEAS home Printed from https://ideas.repec.org/a/kap/expeco/v27y2024i2d10.1007_s10683-023-09816-8.html
   My bibliography  Save this article

Speed traps: algorithmic trader performance under alternative market balances and structures

Author

Listed:
  • Yan Peng

    (Xiamen University)

  • Jason Shachat

    (Durham University Business School)

  • Lijia Wei

    (Wuhan University)

  • S. Sarah Zhang

    (University of Manchester)

Abstract

Using double auction market experiments with both human and agent traders, we demonstrate that agent traders prioritising low latency often generate, sometimes perversely so, diminished earnings in a variety of market structures and configurations. With respect to the benefit of low latency, we only find superior performance of fast-Zero Intelligence Plus (ZIP) buyers to human buyers in balanced markets with the same number of human and fast-ZIP buyers and sellers. However, in markets with a preponderance of agents on one side of the market and a noncompetitive market structure, such as monopolies and duopolies, fast-ZIP agents fall into a speed trap. In such speed traps, fast-ZIP agents capture minimal surplus and, in some cases, experience near first-degree price discrimination. In contrast, the trader performance of slow-ZIP agents is comparable to that of human counterparts, or even better in certain market conditions.

Suggested Citation

  • Yan Peng & Jason Shachat & Lijia Wei & S. Sarah Zhang, 2024. "Speed traps: algorithmic trader performance under alternative market balances and structures," Experimental Economics, Springer;Economic Science Association, vol. 27(2), pages 325-350, April.
  • Handle: RePEc:kap:expeco:v:27:y:2024:i:2:d:10.1007_s10683-023-09816-8
    DOI: 10.1007/s10683-023-09816-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10683-023-09816-8
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s10683-023-09816-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Baron, Matthew & Brogaard, Jonathan & Hagströmer, Björn & Kirilenko, Andrei, 2019. "Risk and Return in High-Frequency Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 993-1024, June.
    2. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2008. "Bootstrap-Based Improvements for Inference with Clustered Errors," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 414-427, August.
    3. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    4. Gjerstad, Steven & Dickhaut, John, 1998. "Price Formation in Double Auctions," Games and Economic Behavior, Elsevier, vol. 22(1), pages 1-29, January.
    5. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
    6. Brice Corgnet & Mark Desantis & David Porter, 2018. "What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance," Journal of Finance, American Finance Association, vol. 73(3), pages 1113-1137, June.
    7. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70(2), pages 111-111.
    8. Noussair, Charles N. & Tucker, Steven & Xu, Yilong, 2016. "Futures markets, cognitive ability, and mispricing in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 166-179.
    9. Friedman, Daniel, 1991. "A simple testable model of double auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 47-70, January.
    10. Gjerstad, Steven, 2007. "The competitive market paradox," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1753-1780, May.
    11. Brice Corgnet & Roberto Hernán-González & Praveen Kujal & David Porter, 2015. "The Effect of Earned Versus House Money on Price Bubble Formation in Experimental Asset Markets," Review of Finance, European Finance Association, vol. 19(4), pages 1455-1488.
    12. Bossaerts, Peter & Plott, Charles R., 2008. "From Market Jaws to the Newton Method: The Geometry of How a Market Can Solve Systems of Equations," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 2, pages 22-24, Elsevier.
    13. Andrei Kirilenko & Albert S. Kyle & Mehrdad Samadi & Tugkan Tuzun, 2017. "The Flash Crash: High-Frequency Trading in an Electronic Market," Journal of Finance, American Finance Association, vol. 72(3), pages 967-998, June.
    14. Angerer, Martin & Neugebauer, Tibor & Shachat, Jason, 2023. "Arbitrage bots in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 206(C), pages 262-278.
    15. Brice Corgnet & Mark Desantis & David Porter, 2018. "What Makes a Good Trader? On the Role of Reflection and Intuition on Trader Performance," Post-Print hal-02312062, HAL.
    16. Tai, Chung-Ching & Chen, Shu-Heng & Yang, Lee-Xieng, 2018. "Cognitive ability and earnings performance: Evidence from double auction market experiments," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 409-440.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brice Corgnet & Mark DeSantis & Christoph Siemroth, 2023. "Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach," Working Papers 2313, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Corgnet, Brice & DeSantis, Mark & Porter, David, 2020. "The distribution of information and the price efficiency of markets," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    3. Te Bao & Elizaveta Nekrasova & Tibor Neugebauer & Yohanes E. Riyanto, 2022. "Algorithmic trading in experimental markets with human traders: A literature survey," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 23, pages 302-322, Edward Elgar Publishing.
    4. Itzhak Rasooly, 2022. "Competitive equilibrium and the double auction," Economics Series Working Papers 974, University of Oxford, Department of Economics.
    5. Tai, Chung-Ching & Chen, Shu-Heng & Yang, Lee-Xieng, 2018. "Cognitive ability and earnings performance: Evidence from double auction market experiments," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 409-440.
    6. Lambrecht, Marco & Sofianos, Andis & Xu, Yilong, 2020. "Does mining fuel bubbles? An experimental study on cryptocurrency markets," Working Papers 0690, University of Heidelberg, Department of Economics.
    7. Nicolas Eber & Patrick Roger & Tristan Roger, 2024. "Finance and intelligence: An overview of the literature," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 503-554, April.
    8. Itzhak Rasooly, 2022. "Competitive equilibrium and the double auction," Papers 2209.07532, arXiv.org.
    9. Brewer, Paul & Ratan, Anmol, 2019. "Profitability, efficiency, and inequality in double auction markets with snipers," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 486-499.
    10. Xintong Wang & Christopher Hoang & Yevgeniy Vorobeychik & Michael P. Wellman, 2021. "Spoofing the Limit Order Book: A Strategic Agent-Based Analysis," Games, MDPI, vol. 12(2), pages 1-43, May.
    11. Sabiou M. Inoua & Vernon L. Smith, 2022. "Perishable goods versus re-tradable assets: A theoretical reappraisal of a fundamental dichotomy," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 15, pages 162-171, Edward Elgar Publishing.
    12. Corgnet, Brice & Hernán-González, Roberto & Kujal, Praveen, 2020. "On booms that never bust: Ambiguity in experimental asset markets with bubbles," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    13. Steven Gjerstad, 2013. "Price dynamics in an exchange economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 461-500, March.
    14. Adam Farago & Martin Holmén & Felix Holzmeister & Michael Kirchler & Michael Razen, 2019. "Cognitive Skills and Economic Preferences in the Fund Industry," Working Papers 2019-16, Faculty of Economics and Statistics, Universität Innsbruck.
    15. Nobuyuki Hanaki, 2020. "Cognitive ability and observed behavior in laboratory experiments: implications for macroeconomic theory," The Japanese Economic Review, Springer, vol. 71(3), pages 355-378, July.
    16. Jason Shachat & Zhenxuan Zhang, 2017. "The Hayek Hypothesis and Long‐run Competitive Equilibrium: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 127(599), pages 199-228, February.
    17. Großer, Jens & Reuben, Ernesto, 2013. "Redistribution and market efficiency: An experimental study," Journal of Public Economics, Elsevier, vol. 101(C), pages 39-52.
    18. Tseng, Jie-Jun & Lin, Chih-Hao & Lin, Chih-Ting & Wang, Sun-Chong & Li, Sai-Ping, 2010. "Statistical properties of agent-based models in markets with continuous double auction mechanism," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(8), pages 1699-1707.
    19. Steven Gjerstad & Jason M. Shachat, 2007. "Individual Rationality and Market Efficiency," Purdue University Economics Working Papers 1204, Purdue University, Department of Economics.
    20. Marquardt, Philipp & Noussair, Charles N & Weber, Martin, 2019. "Rational expectations in an experimental asset market with shocks to market trends," European Economic Review, Elsevier, vol. 114(C), pages 116-140.

    More about this item

    Keywords

    Trading agents; Speed; Algorithmic trading; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:expeco:v:27:y:2024:i:2:d:10.1007_s10683-023-09816-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.