Agent-Based Quantitative Financial Strategies & Price Formation: Systems & Evolutionary Dynamics as Deciphering Keys of the High Frequency Trading Ecosystem

26 Pages Posted: 20 Sep 2017 Last revised: 10 Aug 2018

See all articles by Babak Mahdavi-Damghani

Babak Mahdavi-Damghani

University of Oxford - Oxford-Man Institute of Quantitative Finance

Stephen Roberts

University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: September 18, 2017

Abstract

In this paper we propose a new approach to studying electronic trading & systemic risk by re-introducing the High Frequency Trading Ecosystem (HFTE) model [71]. We specify an approach in which agents interact through a topological structure designed to address the complexity demands of most common high frequency strategies but designed randomly at inception. This strategy ecosystem is then studied through a simplified genetic algorithm. The results open up intriguing social and regulatory implications which we propose to study through tracking methodologies and results from theoretical biology. The proposed simplifications aim to bring rigour compared to our first attempt at studying the problem as well as present a practical implementation in the form of the construction of a simulated market for testing strategies impact.

Keywords: High Frequency Trading Ecosystem (HFTE), High Frequency Financial Funnel (HFFF), Multi-Target Tracking (MTT), Stability of Financial Systems, Markov Chain Monte Carlo (MCMC), Reversible-Jump, RJ-MCMC, Data Analysis and Patterns in Data, Electronic Trading, Systemic Risk, High Frequency Trading

Suggested Citation

Mahdavi-Damghani, Babak and Roberts, Stephen, Agent-Based Quantitative Financial Strategies & Price Formation: Systems & Evolutionary Dynamics as Deciphering Keys of the High Frequency Trading Ecosystem (September 18, 2017). Available at SSRN: https://ssrn.com/abstract=3039188 or http://dx.doi.org/10.2139/ssrn.3039188

Babak Mahdavi-Damghani (Contact Author)

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

United Kingdom

Stephen Roberts

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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