| Preface | p. vii |
| Foresight, Unpredictability and Strategies | p. 1 |
| Introduction | p. 1 |
| What is Agent-Based Modeling? | p. 8 |
| Nasdaq Market Overview | p. 12 |
| Nasdaq Simulation Model Overview | p. 13 |
| Existing Market Modeling and Simulation Work | p. 15 |
| Complexity and Agent-Based Modeling | p. 16 |
| Financial Markets and Agent-Based Modeling | p. 17 |
| Artificial Intelligence, Machine Learning, and Other Approaches to Modeling Agent Strategies | p. 19 |
| Market Dynamics - Analytical Results | p. 21 |
| Introduction | p. 21 |
| Spreads in Markets | p. 23 |
| Summary of the Glosten-Milgrom Model | p. 23 |
| GM Model, Information, and Bayesian Updates | p. 24 |
| Convergence Times | p. 26 |
| Tick-Size Effects | p. 26 |
| Extension of the GM Model to Multinomial Prices | p. 27 |
| The Mathematical Formulas for the Multinomial Case | p. 28 |
| Updating the Probability in the Recursive Case | p. 28 |
| Setting the Bid-Ask Prices | p. 30 |
| The Binomial Case | p. 31 |
| Multinomial Additions | p. 32 |
| Convergence of Beliefs | p. 34 |
| Extension of GM to Incorporate Inventory | p. 34 |
| Convergence of Beliefs | p. 35 |
| Price Dynamics | p. 36 |
| Agent-Based Model and Simulation Results | p. 39 |
| Introduction | p. 39 |
| Model Overview | p. 41 |
| Market | p. 41 |
| Strategies | p. 42 |
| Evolutionary Selection of Strategies and Learning Strategies | p. 46 |
| An Outline of the Computer Model | p. 48 |
| Results | p. 50 |
| Tick Size Effects on Price Discovery | p. 50 |
| Explanations of Observed Results | p. 56 |
| Effects of Parasitism | p. 56 |
| Effects of Tick Size | p. 57 |
| Aggregate Behavior of the Market | p. 58 |
| Fat Tails | p. 59 |
| Herding Effects | p. 60 |
| Range of Fat Tails | p. 62 |
| Spread Clustering | p. 63 |
| Other Results | p. 65 |
| Profitability of Market Makers' Strategies | p. 65 |
| Informational Content of the Trades | p. 66 |
| Market Structure Analysis | p. 66 |
| Market's Predictability | p. 66 |
| Effects of Market Infrastructure | p. 67 |
| Effects of Learning and Evolution | p. 67 |
| Conclusions | p. 69 |
| Spread Clustering | p. 71 |
| Introduction | p. 71 |
| Spread Clustering | p. 72 |
| Spread Clustering with Learning and Basic Inventory Market Makers | p. 72 |
| Spread Clustering with Other Dealer Types | p. 74 |
| Are the Spread Clustering Results Meaningful? Pros and Cons | p. 76 |
| Real World Relevance of the Spread Clustering Results | p. 76 |
| Possible Criticism | p. 77 |
| Validity of the Observed Clustering Effects | p. 77 |
| Possible Reasons for Observed Clustering of Spread Sizes | p. 79 |
| Conclusions | p. 80 |
| Learning, Evolution and Tick Size Effects | p. 81 |
| Types of Reinforcement-Learning Dealers | p. 81 |
| The Reinforcement-Learning Framework and Incentive Structure | p. 84 |
| Learning in the Market | p. 86 |
| Calibration | p. 89 |
| Introduction | p. 89 |
| Results | p. 90 |
| Calibration Methodology | p. 92 |
| Calibrating to the Trading Volume Distribution | p. 92 |
| Calibration on the Individual Level | p. 92 |
| Quantitative Behaviors: Calibrating Simulated Strategies Against Real-World Strategies | p. 93 |
| Parameter Discovery for Basic Dealers | p. 95 |
| Parameter Discovery for Volume Dealers | p. 97 |
| Time series comparisons | p. 97 |
| Statistical analysis | p. 99 |
| Identification of Analytic Parasites | p. 100 |
| Results - Basic Dealers | p. 101 |
| Results - Volume Dealers and Parasitic Dealers | p. 103 |
| Wealth Effects Analysis | p. 108 |
| Conclusions | p. 110 |
| Phase Transitions in the Market | p. 111 |
| Data Preparation | p. 111 |
| Time Series Regularization Procedure | p. 111 |
| Price Response to the Number of Transactions and Their Volume | p. 112 |
| Phase Transitions Analysis | p. 114 |
| Conclusions | p. 115 |
| Validation: After Decimalization and the Tick-Size Change | p. 119 |
| Introduction | p. 119 |
| Comparing Predictions with the Actual Decimalization Results | p. 121 |
| Negative Effects on the Price Discovery Process | p. 121 |
| Possible Volume Increases | p. 122 |
| Ambiguous Investor Wealth Effects | p. 123 |
| Phase Transitions in the Space of Market-Maker Strategies | p. 124 |
| Spread Clustering | p. 124 |
| More Effective Parasitic Strategies | p. 124 |
| Conclusions and Directions for the Future | p. 125 |
| Future Developments of the Model | p. 127 |
| Qualitative Scenario Investigation | p. 127 |
| Macrostructure Explanation | p. 128 |
| Risk Analysis | p. 128 |
| Agent Soup of the Day | p. 128 |
| The Agent-Based Model Software | p. 131 |
| Graphical User Interface | p. 132 |
| Menus | p. 135 |
| Charts | p. 136 |
| Market and Pricing Charts | p. 136 |
| Market Maker Performance | p. 139 |
| Investor Performance | p. 139 |
| Interacting with the Market | p. 140 |
| Batch Mode | p. 141 |
| Basic Description of Object Simulation Framework | p. 142 |
| Bibliography | p. 145 |
| Index | p. 151 |
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