Humans vs. Algorithms – Who Follows Newcomb-Benford’s Law Better with Their Order Volume?

Lecture Notes in Business Information Processing, 136, pp. 61-70

14 Pages Posted: 3 May 2012 Last revised: 17 Jun 2018

See all articles by Martin Haferkorn

Martin Haferkorn

Goethe University Frankfurt Faculty of Economics and Business Administration

Date Written: May 3, 2012

Abstract

Newcomb-Benford’s Law (NBL) is a well known regularity in the distribution of first significant digits (FSD) and therefore research in this field is manifold. As of 2012 research in the domain of financial markets is quite scarce, especially in the field algorithmic trading. We pose the question whether order submission volumes of algorithmic traders and human traders follow NBL. Results in this context might help regulators to detect suspicious market activity and market participants to quantify the amount of algorithmic trading. Our findings indicate that the submitted order volumes of both groups follow NBL more than to the uniform distribution. Comparing these two groups, we proof that algorithmic traders match NBL better than human traders, as human traders tend to overuse "the FSD five".

Keywords: algorithmic trading, electronic trading, financial markets, Newcomb-Benford’s Law

JEL Classification: G10, G15, G19

Suggested Citation

Haferkorn, Martin, Humans vs. Algorithms – Who Follows Newcomb-Benford’s Law Better with Their Order Volume? (May 3, 2012). Lecture Notes in Business Information Processing, 136, pp. 61-70. Available at SSRN: https://ssrn.com/abstract=2050317

Martin Haferkorn (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

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