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How Trading Strategies Shape Price Dynamics in a Market Maker Model

Article arXiv papers · Author: J. Doyne Farmer et al.
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Summary

This paper examines how deterministic trading strategies can affect the price process. It frames a strategy as a signal-processing mechanism that uses external information and past prices, then studies how strategy-driven orders are incorporated into future prices. The analysis uses a market-maker-based model of price formation to trace the resulting dynamics.

The document reports that common strategies can amplify noise, create structure in prices, and contribute to excess and clustered volatility. This perspective connects strategy design with market behavior: observed price patterns may partly arise from the interaction of trading rules and price formation, rather than only from external information. The abstract does not identify the specific strategies studied, provide model assumptions or quantitative results, or establish how closely the modeled dynamics match live markets. It therefore offers a conceptual account of possible mechanisms rather than enough detail to assess a particular strategy or use the findings as a trading rule.

Key ideas

  • The paper treats deterministic strategies as mechanisms that transform information and past prices into trading signals.
  • A market-maker-based price-formation model is used to study strategy-induced price dynamics.
  • Trading strategies can amplify noise and introduce structure into prices.
  • The modeled strategy interactions can produce excess and clustered volatility.
  • The abstract does not specify the strategies, calibration, or empirical validation used.

Tags

Market makingMarket microstructureVolatilityStatistics
Full text
# The price dynamics of common trading strategies


# The price dynamics of common trading strategies









A deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices. This paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies, showing how they amplify noise, induce structure in prices, and cause phenomena such as excess and clustered volatility.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.