Speed traps: algorithmic trader performance under alternative market balances and structures

Abstract

AbstractUsing double auction market experiments with both human and agent traders, we demonstrate that agent traders prioritising low latency often generate, sometimes perversely so, diminished earnings in a variety of market structures and configurations. With respect to the benefit of low latency, we only find superior performance of fast-Zero Intelligence Plus (ZIP) buyers to human buyers in balanced markets with the same number of human and fast-ZIP buyers and sellers. However, in markets with a preponderance of agents on one side of the market and a noncompetitive market structure, such as monopolies and duopolies, fast-ZIP agents fall into a speed trap. In such speed traps, fast-ZIP agents capture minimal surplus and, in some cases, experience near first-degree price discrimination. In contrast, the trader performance of slow-ZIP agents is comparable to that of human counterparts, or even better in certain market conditions.