SUM: a Surprising (Un)realistic Market: Building a Simple Stock Market Structure with Swarm

With SUM, a Surprising (Un)realistic Market, we are dealing with the microfoundations of a stock market. We avoid any artificially simplified solution about price formation, such as to employ an auctioneer to clear the market; on the contrary, our model produces time series of prices continuously evolving, transaction by transaction. The core of the model is represented by a computational structure that reproduces closely the behavior of the computerized book of a real stock market. The agents send to the book their buy and sell orders, with the related limit prices. The book executes immediately the orders if a counterpart is found in its log; otherwise, it records separately the buy and sell orders, to match them with future orders. The book is cleared at the beginning of each day. Our (un)realistic market emerges from the behavior of myopic agents that: (i) know only the last executed price, (ii) choose randomly, in a balanced way, the buy or sell side and (iii) fix their limit price by multiplying the previously executed price times a random coefficient. This structure generates increasing and decreasing price sequences with relevant volatility. Also bubbles and crashes appear in this market, generated within the market structure, without the need of exogenous explanations. Finally, imitation and stop loss behavior are introduced.