The Effect of Fast Traders in Continuous Double Auction Market

Abstract

In this paper, we investigate the effect of fast traders in continuous double action markets using agent-based modeling. We consider two agent types, such as fast and slow traders, by preference of investment time in a high-risk environment. Additionally, the order aggressiveness of agents with superior information and the rule of the updating agent type using a performance measure based on a realized profit are considered in our model. We find several results with rich economic implications: (i) with the non-updating agent type, the model reproduces the positive role of fast traders in previous models and empirical studies, in which they increase market efficiency and liquidity; (ii) with the updating agent type, the model provides empirical implications such as the decrease in fast traders’ profit; (iii) as uncertainty is reduced when updating agent types, fast traders who take more risks than slow traders can survive in the model. This paper provides a more integrated understanding of fast or high-frequency trading in the financial market.