The Role of Stop-Loss Orders in Market Efficiency and Stability: An Agent-Based Study

Patrick Liston, Charles Gretton, Artem Lensky, Artem Lensky

2024

Abstract

Stop-loss orders can have large and ranging effects on the behaviours and outcomes for participants within financial markets. We develop and demonstrate an approach to studying the effect of stop-losses on price dynamics within a financial market. Using our high-fidelity agent-based market simulator that draws on historical limit order book data, we illustrate that the introduction of stop-loss orders leads to volatility, creating the potential for stop-loss cascades that result in large price movements. We study a market containing an agent that is able to trigger such events and profit from them. We indicate that the structure of the stop-loss order book may be used by such an agent to inform trading decisions and to generate volatility within markets for their benefit. Finally we demonstrate how the agents closing strategy effects both the profitability of the agent, as well as the price trajectory of the market.

Paper Citation

in Harvard Style

Liston P., Gretton C. and Lensky A. (2024). The Role of Stop-Loss Orders in Market Efficiency and Stability: An Agent-Based Study. In Proceedings of the 16th International Conference on Agents and Artificial Intelligence - Volume 1: ICAART; ISBN 978-989-758-680-4, SciTePress, pages 280-288. DOI: 10.5220/0012371400003636

in Bibtex Style

@conference{icaart24,
author={Patrick Liston and Charles Gretton and Artem Lensky},
title={The Role of Stop-Loss Orders in Market Efficiency and Stability: An Agent-Based Study},
booktitle={Proceedings of the 16th International Conference on Agents and Artificial Intelligence - Volume 1: ICAART},
year={2024},
pages={280-288},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0012371400003636},
isbn={978-989-758-680-4},
}

in EndNote Style

TY - CONF

JO - Proceedings of the 16th International Conference on Agents and Artificial Intelligence - Volume 1: ICAART
TI - The Role of Stop-Loss Orders in Market Efficiency and Stability: An Agent-Based Study
SN - 978-989-758-680-4
AU - Liston P.
AU - Gretton C.
AU - Lensky A.
PY - 2024
SP - 280
EP - 288
DO - 10.5220/0012371400003636
PB - SciTePress