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on Market Microstructure |
| By: | Dobrislav Dobrev; Joon Kim; Edith X. Liu; Marius del Giudice Rodriguez |
| Abstract: | This note provides a novel view on market functioning and argues for the importance of monitoring large directional order flow in understanding notable price moves during periods when liquidity is severely strained. Market turbulence often creates a liquidity mismatch: as volatility increases, liquidity demand surges while supply evaporates. |
| Date: | 2025–11–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-11-03 |
| By: | Mainak Singha |
| Abstract: | Financial markets exhibit an apparent paradox: while directional price movements remain largely unpredictable--consistent with weak-form efficiency--the magnitude of price changes displays systematic structure. Here we demonstrate that real-time order-flow entropy, computed from a 15-state Markov transition matrix at second resolution, predicts the magnitude of intraday returns without providing directional information. Analysis of 38.5 million SPY trades over 36 trading days reveals that conditioning on entropy below the 5th percentile increases subsequent 5-minute absolute returns by a factor of 2.89 (t = 12.41, p |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.15720 |
| By: | Yijia Chen |
| Abstract: | The integration of Deep Reinforcement Learning (DRL) and Evolutionary Computation (EC) is frequently hypothesized to be the "Holy Grail" of algorithmic trading, promising systems that adapt autonomously to non-stationary market regimes. This paper presents a rigorous post-mortem analysis of "Galaxy Empire, " a hybrid framework coupling LSTM/Transformer-based perception with a genetic "Time-is-Life" survival mechanism. Deploying a population of 500 autonomous agents in a high-frequency cryptocurrency environment, we observed a catastrophic divergence between training metrics (Validation APY $>300\%$) and live performance (Capital Decay $>70\%$). We deconstruct this failure through a multi-disciplinary lens, identifying three critical failure modes: the overfitting of \textit{Aleatoric Uncertainty} in low-entropy time-series, the \textit{Survivor Bias} inherent in evolutionary selection under high variance, and the mathematical impossibility of overcoming microstructure friction without order-flow data. Our findings provide empirical evidence that increasing model complexity in the absence of information asymmetry exacerbates systemic fragility. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.15732 |
| By: | Tingting Ding; Steven F. Lehrer |
| Abstract: | We conduct a series of laboratory experiments that implement the Daley and Green (2020) model to examine whether the gradual, exogenous revelation of sellers’ private information influences the occurrence of trades in a bilateral bargaining setting with a static lemon condition. We find that while information does not increase efficiency, it reduces the likelihood that buyers incur losses when trading with low-quality sellers. Anticipating that additional signals will arrive, buyers hesitate to finalize deals immediately and exhibit a “waiting for news” effect, making sizable offer adjustments only when sufficient positive signals have accumulated. In contrast, informed sellers are less sensitive to news but appear to wait for the offer that they deem acceptable. |
| JEL: | C70 C92 D82 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34543 |
| By: | Anthropelos, Michail; Kardaras, Constantinos |
| Abstract: | We consider a financial market in which traders potentially face restrictions in trading some of the available securities. Traders are heterogeneous with respect to their beliefs and risk profiles, and the market is assumed thin: traders strategically trade against their price impacts. We prove existence and uniqueness of a corresponding equilibrium, and provide an efficient algorithm to numerically obtain the equilibrium prices and allocations given market's inputs. We find that restrictions may increase the market's welfare if traders have different views regarding the covariance matrix of securities returns. The latter heterogeneity regarding covariance matrix disagreement is essential in modelling; for instance, when traders agree on the covariance matrix, restricting participation in some securities for some traders leaves equilibrium prices unaltered in the unrestricted securities, a certainly undesirable model effect. |
| Keywords: | thin markets; restricted participation; constrained participation; price impact; risk sharing; Nash equilibrium; heterogeneous beliefs; disagreement on second moments; welfare |
| JEL: | J1 |
| Date: | 2024–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:121058 |
| By: | Tianyi Ma |
| Abstract: | In decentralized finance (DeFi), designing fixed-income lending automated market makers (AMMs) is extremely challenging due to time-related complexities. Moreover, existing protocols only support single-maturity lending. Building upon the BondMM protocol, this paper argues that its mathematical invariants are sufficiently elegant to be generalized to arbitrary maturities. This paper thus propose an improved design, BondMM-A, which supports lending activities of any maturity. By integrating fixed-income instruments of varying maturities into a single smart contract, BondMM-A offers users and liquidity providers (LPs) greater operational freedom and capital efficiency. Experimental results show that BondMM-A performs excellently in terms of interest rate stability and financial robustness. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.16080 |
| By: | Michele Fabi; Viraj Nadkarni; Leonardo Leone; Matheus X. V. Ferreira |
| Abstract: | We develop an axiomatic theory for Automated Market Makers (AMMs) in local energy sharing markets and analyze the Markov Perfect Equilibrium of the resulting economy with a Mean-Field Game. In this game, heterogeneous prosumers solve a Bellman equation to optimize energy consumption, storage, and exchanges. Our axioms identify a class of mechanisms with linear, Lipschitz continuous payment functions, where prices decrease with the aggregate supply-to-demand ratio of energy. We prove that implementing batch execution and concentrated liquidity allows standard design conditions from decentralized finance-quasi-concavity, monotonicity, and homotheticity-to construct AMMs that satisfy our axioms. The resulting AMMs are budget-balanced and achieve ex-ante efficiency, contrasting with the strategy-proof, expost optimal VCG mechanism. Since the AMM implements a Potential Game, we solve its equilibrium by first computing the social planner's optimum and then decentralizing the allocation. Numerical experiments using data from the Paris administrative region suggest that the prosumer community can achieve gains from trade up to 40% relative to the grid-only benchmark. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.24432 |