Jean-Edouard Colliard, HEC Paris

"Algorithmic Pricing and Liquidity in Securities Markets"

Abstract

We run experiments in which machine-learning algorithms play a standard market-making game under adverse selection. We study how the outcome of these experiments differs from standard equilibrium predictions. We find that a monopolist market-maker charges a price lower than the standard monopoly price. In contrast, competing market-makers charge a price at a mark-up above the competitive price. We run comparative statics exercises that deliver new empirical predictions. In particular, the mark-up decreases in the amount of adverse selection. Beyond the case of market-making, our framework is a step towards developing novel predictions on the impact of algorithmic trading in financial markets.

Contact person: Peter Norman Sørensen