The impact of algorithmic trading in a simulated asset market

Algorithmic trading (AT) in asset markets has risen in importance over the past decade, revolutionizing the way market transactions are conducted. The extant empirical literature provides sometimes contradictory results on the impact of AT on market quality parameters such as liquidity and volatility. In this work we create a computer simulated asset market in order to make the effects of algorithmic trading more transparent to observers. Our market consists of human and algorithmic counterparts of traders that trade based on technical analysis, fundamental analysis and pairs trading strategies. The difference between human traders and algorithmic traders is in the speed of trading. Our preliminary results indicate that liquidity improves as the share of algorithmic traders increases, while no clear trend emerges for volatility. Pairs trading leads to an decrease in correlation between price of a stock and its fundamental value.