nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒09‒19
two papers chosen by
Thanos Verousis

  1. A simple learning agent interacting with an agent-based market model By Matthew Dicks; Tim Gebbie
  2. Exploring Price Accuracy on Uniswap V3 in Times of Distress By Lioba Heimbach; Eric Schertenleib; Roger Wattenhofer

  1. By: Matthew Dicks; Tim Gebbie
    Abstract: We consider the learning dynamics of a single reinforcement learning optimal execution trading agent when it interacts with an event driven agent-based financial market model. Trading takes place asynchronously through a matching engine in event time. The optimal execution agent is considered at different levels of initial order-sizes and differently sized state spaces. The resulting impact on the agent-based model and market are considered using a calibration approach that explores changes in the empirical stylised facts and price impact curves. Convergence, volume trajectory and action trace plots are used to visualise the learning dynamics. This demonstrates how an optimal execution agent learns optimal trading decisions inside a simulated reactive market framework and how this in turn generates a back-reaction that changes the simulated market through the introduction of strategic order-splitting.
    Date: 2022–08
  2. By: Lioba Heimbach; Eric Schertenleib; Roger Wattenhofer
    Abstract: Financial markets have evolved over centuries, and exchanges have converged to rely on the order book mechanism for market making. Latency on the blockchain, however, has prevented decentralized exchanges (DEXes) from utilizing the order book mechanism and instead gave rise to the development of market designs that are better suited to a blockchain. Although the first widely popularized DEX, Uniswap V2, stood out through its astonishing simplicity, a recent design overhaul introduced with Uniswap V3 has introduced increasing levels of complexity aiming to increase capital efficiency. In this work, we empirically study the ability of Unsiwap V3 to handle unexpected price shocks. Our analysis finds that the prices on Uniswap V3 were inaccurate during the recent abrupt price drops of two stablecoins: UST and USDT. We identify the lack of agility required of Unsiwap V3 liquidity providers as the root cause of these worrying price inaccuracies. Additionally, we outline that there are too few incentives for liquidity providers to enter liquidity pools, given the elevated volatility in such market conditions.
    Date: 2022–08

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