Time Matters: Exploring the Effects of Urgency and Reaction Speed in Automated Traders

TL;DR

This paper investigates how reaction speed and trading urgency impact automated trading strategies in simulated markets, revealing that faster responses and urgency can significantly alter strategy performance and profitability.

Contribution

It introduces the effects of reaction speed and urgency into trading strategy modeling, showing their significant influence on performance and introducing new variants like ZIP-Pace.

Findings

Reaction speed can reverse the performance hierarchy of trading strategies.

Adding urgency through a pace parameter improves profitability of ZIP traders.

Faster reaction times lead to different optimal strategies in simulated markets.

Abstract

We consider issues of time in automated trading strategies in simulated financial markets containing a single exchange with public limit order book and continuous double auction matching. In particular, we explore two effects: (i) reaction speed - the time taken for trading strategies to calculate a response to market events; and (ii) trading urgency - the sensitivity of trading strategies to approaching deadlines. Much of the literature on trading agents focuses on optimising pricing strategies only and ignores the effects of time, while real-world markets continue to experience a race to zero latency, as automated trading systems compete to quickly access information and act in the market ahead of others. We demonstrate that modelling reaction speed can significantly alter previously published results, with simple strategies such as SHVR outperforming more complex adaptive algorithms such as AA. We also show that adding a pace parameter to ZIP traders (ZIP-Pace, or ZIPP) can create a sense of urgency that significantly improves profitability.