*3.2. Traders' Parameters*

We model three trader strategies: fundamental analysis, technical analysis, and statistical arbitrage/pairs trading. All fundamental traders have the same strategy whether they are algorithmic traders or humans. The same is true for technical traders. Pairs traders are only simulated as algorithmic traders.

The difference between human traders and algorithmic traders is that algorithmic traders trade with higher frequency and lower latency than human traders. Frequency refers to how long it takes the trader to make a decision after the last decision. Latency refers to the time after a decision has been made and before the trade is executed. Therefore, the algorithmic traders can both make trade decisions more often and can execute their trades faster. In addition, algorithmic traders lack human judgement. An example is algorithmic pairs traders, who use no judgment regarding the true association between stocks and trade based solely on short-term price correlations.

Trader parameters are as follows. Human traders make their first decision in the fifth second of the simulation. They can execute their first trade at 10 s. Human trading frequency is between 95 and 105 s, i.e., after their last decision they wait a random value between 95 and 105 s before they make the next decision. Human latency is between 35 and 45 s. Algorithmic traders are much faster. They make their first decision within the first second and can execute in the next second. Then, latency and frequency are both one second so they can make a decision every second and always trade the second after that.

Finally, a risk parameter measures risk tolerance of traders; each trader starts with a budget that gets updated as traders execute trades and the random parameter measures the conditions prevailing in the market at the time of trade such as investor sentiment, etc. All parameters are summarized in Table 2.


