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Determining the optimal market structure using near-zero intelligence traders

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Abstract

We evaluate an agent-based model featuring near-zero-intelligence traders operating in a call market with a wide range of trading rules governing the determination of prices, which orders are executed as well as a range of parameters regarding market intervention by specialists and the presence of informed traders. We optimize these trading rules using a population-based incremental learning algorithm seeking to maximize the trading volume. Our results suggest markets should choose a large tick size and ensure only a small fraction of traders are informed about the order book. The effect of trading rules regarding the determination of prices, priority rules, and specialist intervention, we find to have an ambiguous effect on the outcome.

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Authors and Affiliations

  1. School of Management, University of Bath, Bath, BA2 7AY, UK

    Xinyang Li & Andreas Krause

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  1. Xinyang Li
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  2. Andreas Krause
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Correspondence to Xinyang Li.

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Li, X., Krause, A. Determining the optimal market structure using near-zero intelligence traders. J Econ Interact Coord 5, 155–167 (2010). https://doi.org/10.1007/s11403-010-0069-3

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  • DOI: https://doi.org/10.1007/s11403-010-0069-3

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