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Journal Articles Journal of Evolutionary Economics Year : 2015

Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading

Abstract

We build an agent-based model to study how the interplay between low- and high-frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading exacerbates market volatility and generates flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. By contrast, high-frequency traders activation is event-driven and depends on price fluctuations. High-frequency traders use directional strategies to exploit market information produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we find that the presence of high-frequency traders increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by two salient characteristics of high-frequency traders, i.e., their ability to i. generate high bid-ask spreads and ii. synchronize on the sell side of the limit order book. Finally, we find that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.

Dates and versions

hal-03411703 , version 1 (02-11-2021)

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Giorgio Fagiolo, Sandrine Jacob Leal, Mauro Napoletano, Andrea Roventini. Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading. Journal of Evolutionary Economics, 2015, 26 (1), pp.49 - 76. ⟨10.1007/s00191-015-0418-4⟩. ⟨hal-03411703⟩
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