Algorithmic Trading vs. Bid-Offer Spreads, Volatility, and the Distribution of Profits and Losses: A Simulation

17 Pages Posted: 13 Jan 2013 Last revised: 10 Mar 2013

See all articles by Arne Breuer

Arne Breuer

University of Hohenheim

Hans-Peter Burghof

University of Hohenheim

Date Written: January 9, 2013

Abstract

Algorithmic trading leads to contradictory conclusions of market participants and observers: While the former blame it to break the market, the latter find it makes it better. To explain these contradictory views, we create a few-type market simulation in a discrete-time, one-asset world. We analyse both the observable factors average bid-offer spread and volatility as well as the unobservable distribution of profits and losses of the market participants. We conclude that regarding HFT, market observers and market participants talk at cross-purposes.

Keywords: algorithmic trading, simulation, bid-offer spread, volatility, profit and loss

Suggested Citation

Breuer, Arne and Burghof, Hans-Peter, Algorithmic Trading vs. Bid-Offer Spreads, Volatility, and the Distribution of Profits and Losses: A Simulation (January 9, 2013). Available at SSRN: https://ssrn.com/abstract=2200075 or http://dx.doi.org/10.2139/ssrn.2200075

Arne Breuer (Contact Author)

University of Hohenheim ( email )

Stuttgart
Germany

Hans-Peter Burghof

University of Hohenheim ( email )

Schloss Hohenheim
510F
Stuttgart, 70599
Germany
+49 711 459 22900 (Phone)
+49 711 459 23448 (Fax)