Artificial economic life: a simple model of a stockmarket
Proceedings of the NATO advanced research workshop and EGS topical workshop on Chaotic advection, tracer dynamics and turbulent dispersion
The effects of market-making on price dynamics
Proceedings of the 7th international joint conference on Autonomous agents and multiagent systems - Volume 2
What the 2007 TAC Market Design Game tells us about effective auction mechanisms
Autonomous Agents and Multi-Agent Systems
Trading Agents
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We study the effect of latency arbitrage on allocative efficiency and liquidity in fragmented financial markets. We propose a simple model of latency arbitrage in which a single security is traded on two exchanges, with aggregate information available to regular traders only after some delay. An infinitely fast arbitrageur profits from market fragmentation by reaping the surplus when the two markets diverge due to this latency in cross-market communication. We develop a discrete-event simulation system to capture this processing and information transfer delay, and using an agent-based approach, we simulate the interactions between high-frequency and zero-intelligence trading agents at the millisecond level. We then evaluate allocative efficiency and market liquidity arising from the simulated order streams, and we find that market fragmentation and the presence of a latency arbitrageur reduces total surplus and negatively impacts liquidity. By replacing continuous-time markets with periodic call markets, we eliminate latency arbitrage opportunities and achieve further efficiency gains through the aggregation of orders over short time periods.