Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach

62 Pages Posted: 22 Apr 2023 Last revised: 30 Aug 2023

See all articles by Brice Corgnet

Brice Corgnet

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Mark DeSantis

Chapman University - The George L. Argyros College of Business and Economics

Christoph Siemroth

University of Essex - Department of Economics

Date Written: April 14, 2023

Abstract

We develop a novel experimental paradigm to study the causal impact of two classes of trading algorithms on price efficiency, trading volume, liquidity, and welfare. In our design, public information about the asset value is revealed during trading, which gives algorithms a reaction speed advantage. We distinguish market-order (aggressive) and limit-order (passive) algorithms, which replace human traders from the baseline markets. Relative to human-only markets, limit-order algorithms improve welfare, although human traders do not benefit, as the surplus is captured by the algorithms. Market-order algorithms do not change welfare, though they do lower human traders' profits. Both types of algorithms improve price efficiency, lower volatility, and increase the share of profits for unsophisticated human traders. Our results offer unique evidence that non-exploitative algorithms can enhance welfare and be beneficial to unsophisticated traders.

Keywords: Algorithmic Trading, Experimental Markets, High-Frequency Trading, Informational Efficiency, News Announcements, Welfare

JEL Classification: C92, D61, G12, G14, G41

Suggested Citation

Corgnet, Brice and DeSantis, Mark and Siemroth, Christoph, Algorithmic Trading, Price Efficiency and Welfare: An Experimental Approach (April 14, 2023). Available at SSRN: https://ssrn.com/abstract=4419304 or http://dx.doi.org/10.2139/ssrn.4419304

Brice Corgnet

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE) ( email )

Lyon
France

Mark DeSantis

Chapman University - The George L. Argyros College of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

Christoph Siemroth (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

HOME PAGE: http://sites.google.com/site/csiemroth/

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