New ABM White Paper on SEC Market Structure Website

An application of agent-based modeling to market structure policy: the case of the U.S. Tick Size Pilot Program and market maker profitability

Abstract

I demonstrate the feasibility of applying a heterogeneous agent-based model of a modern limit order market to inform U.S. equity market structure policy. The model specifically addresses matters related to the U.S. Tick Size Pilot Program as an example to demonstrate the utility of agent-based models in general. In this case, the model provides quantitative results on changes in market maker participation and profitability as well as quoted spreads when the minimum pricing increment is raised from one tick to five ticks. Perhaps more importantly, the very act of applying the agent-based model and analyzing the results generates additional insights into the nuances of the impact of tick size on small cap equity market quality. Agent-based modeling should be included in the regulatory toolbox because it can not only provide answers to specific policy-related questions but can also help policy-makers ask better questions before implementing the policy.

Published by

Chuck Collver

Quant, Programmer, Data Scientist, Developer

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