Modelling Opaque Bilateral Market Dynamics in Financial Trading: Insights from a Multi-Agent Simulation Study

TL;DR

This paper presents a multi-agent simulation model for opaque bilateral financial markets, specifically Australian government bond OTC trading, highlighting the effects of market rigidity and stability in such limited-agent environments.

Contribution

It introduces a novel multi-agent simulation approach using meta-heuristic methods to model opaque bilateral markets, addressing data limitations and market rigidity.

Findings

Market rigidity impacts market stability and structure.

Agent-based models provide insights into OTC trading dynamics.

Simulation captures bilateral negotiation behaviors.

Abstract

Exploring complex adaptive financial trading environments through multi-agent based simulation methods presents an innovative approach within the realm of quantitative finance. Despite the dominance of multi-agent reinforcement learning approaches in financial markets with observable data, there exists a set of systematically significant financial markets that pose challenges due to their partial or obscured data availability. We, therefore, devise a multi-agent simulation approach employing small-scale meta-heuristic methods. This approach aims to represent the opaque bilateral market for Australian government bond trading, capturing the bilateral nature of bank-to-bank trading, also referred to as "over-the-counter" (OTC) trading, and commonly occurring between "market makers". The uniqueness of the bilateral market, characterized by negotiated transactions and a limited number of agents, yields valuable insights for agent-based modelling and quantitative finance. The inherent rigidity of this market structure, which is at odds with the global proliferation of multilateral platforms and the decentralization of finance, underscores the unique insights offered by our agent-based model. We explore the implications of market rigidity on market structure and consider the element of stability, in market design. This extends the ongoing discourse on complex financial trading environments, providing an enhanced understanding of their dynamics and implications.