Imperfect Oracles: The Effect of Strategic Information on Stock Markets

TL;DR

This paper investigates how noisy, imperfect information about strategies influences stock market dynamics and trader profits, highlighting the impact of information quality and timing on market efficiency.

Contribution

It introduces a comprehensive analysis of the effects of imperfect, noisy strategic information on trader performance and market behavior, including the influence of changing order schedules.

Findings

Noisy information reduces trader efficiency.

Imperfect oracles can still provide strategic advantage.

Information noise impacts profit potential and market stability.

Abstract

Modern financial market dynamics warrant detailed analysis due to their significant impact on the world. This, however, often proves intractable; massive numbers of agents, strategies and their change over time in reaction to each other leads to difficulties in both theoretical and simulational approaches. Notable work has been done on strategy dominance in stock markets with respect to the ratios of agents with certain strategies. Perfect knowledge of the strategies employed could then put an individual agent at a consistent trading advantage. This research reports the effects of imperfect oracles on the system - dispensing noisy information about strategies - information which would normally be hidden from market participants. The effect and achievable profits of a singular trader with access to an oracle were tested exhaustively with previously unexplored factors such as changing order schedules. Additionally, the effect of noise on strategic information was traced through its effect on trader efficiency.