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Humans in charge of trading robots: the first experiment

Author

Listed:
  • Elena Asparouhova
  • Peter Bossaerts
  • Xiaoqin Cai
  • Kristian Rotaru
  • Nitin Yadav
  • Wenhao Yang

Abstract

We present results from an experiment where participants have access to automated trading algorithms, which they may deploy at will while still trading manually. Treatments differ in whether robots must not be halted, deployment is compulsory, or robots can be halted and replaced at will. We hypothesize that robot trading would reduce mispricing, and that the effect would be more pronounced as commitment degree increases. Yet, compared to manual trading only, we observe equally large and frequent mispricing and, in early trading, significantly higher bid–ask spreads and more frequent flash crashes/price surges. Participants earn more, provided they combine robot and manual trading. Compared to evidence from archival data, we find significantly higher use of liquidity-taking robots. We attribute this to the inability, in the field, to identify the presence of liquidity takers when they happen not to trade.

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Xiaoqin Cai & Kristian Rotaru & Nitin Yadav & Wenhao Yang, 2024. "Humans in charge of trading robots: the first experiment," Review of Finance, European Finance Association, vol. 28(4), pages 1215-1244.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:4:p:1215-1244.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae007
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    More about this item

    Keywords

    algorithmic trading; robot-human interaction; robot trading; financial market bubbles; experimental finance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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