2023/11/27 by Colin M. Van Oort, Van Oort, Colin M., Ethan Ratliff-Crain +5
Decision Sciences · Economics, Econometrics and Finance · #Auction Theory and Applications #Complex Systems and Time Series Analysis #FOS: Economics and business #Financial Markets and Investment Strategies #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.2311.15974
openalex publication_date 2023/11/27 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We present our Agent-Based Market Microstructure Simulation (ABMMS), an Agent-Based Financial Market (ABFM) that captures much of the complexity present in the US National Market System for equities (NMS). Agent-Based models are a natural choice for understanding financial markets. Financial markets feature a constrained action space that should simplify model creation, produce a wealth of data that should aid model validation, and a successful ABFM could strongly impact system design and policy development processes. Despite these advantages, ABFMs have largely remained an academic novelty. We hypothesize that two factors limit the usefulness of ABFMs. First, many ABFMs fail to capture relevant microstructure mechanisms, leading to differences in the mechanics of trading. Second, the simple agents that commonly populate ABFMs do not display the breadth of behaviors observed in human traders or the trading systems that they create. We investigate these issues through the development of ABMMS, which features a fragmented market structure, communication infrastructure with propagation delays, realistic auction mechanisms, and more. As a baseline, we populate ABMMS with simple trading agents and investigate properties of the generated data. We then compare the baseline with experimental conditions that explore the impacts of market topology or meta-reinforcement learning agents. The combination of detailed market mechanisms and adaptive agents leads to models whose generated data more accurately reproduce stylized facts observed in actual markets. These improvements increase the utility of ABFMs as tools to inform design and policy decisions.