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  1. An index-based exchange traded fund (ETF) with underlying se- curities that trade on the same market creates potential opportu- nities for arbitrage between price deviations in the ETF and the corresponding index. We examine whether ETF arbitrage trans- mits small volatility events, termed mini flash crashes, from one of its underlying symbols to another. We address this question in an agent-based, simulated market where agents can trade an ETF and its two underlying symbols. We explore multiple market configurations with active and inactive ETF arbitrageurs. Through empirical game-theoretic analysis, we find that when arbitrageurs actively trade, background traders’ surplus increasesmore »because of the increased liquidity. Arbitrage helps the ETF more accurately track the index. We also observe that when one symbol experiences a mini flash crash, arbitrage transmits a price change in the opposite direction to the other symbol. The size of the mini flash crash de- pends more on the market configuration than the arbitrageurs, but the recovery of the mini flash crash is faster when arbitrageurs are present.« less
    Free, publicly-accessible full text available November 3, 2022
  2. We introduce ABIDES, an open source Agent-Based Interactive Discrete Event Simulation environment. ABIDES is designed from the ground up to support agent-based research in market applications. While proprietary simulations are available within trading firms, there are no broadly available high-fidelity market simulation environments. ABIDES enables the simulation of tens of thousands of trading agents interacting with an exchange agent to facilitate transactions. It supports configurable pairwise noisy network latency between each individual agent as well as the exchange. Our simulator's message-based design is modeled after NASDAQ's published equity trading protocols ITCH and OUCH. We introduce the design of the simulatormore »and illustrate its use and configuration with sample code, validating the environment with example trading scenarios. The utility of ABIDES for financial research is illustrated through experiments to develop a market impact model. The core of ABIDES is a general-purpose discrete event simulation, and we demonstrate its breadth of application with a non-finance work-in-progress simulating secure multiparty federated learning. We close with discussion of additional experimental problems it can be, or is being, used to explore, such as the development of machine learning trading algorithms. We hope that the availability of such a platform will facilitate research in this important area.« less
  3. Given only the historic net asset value of a large-cap mutual fund, which members of some universe of stocks are held by the fund? Discovering an exact solution is combinatorially intractable because there are, for example, C(500, 30) or 1.4 × 10^48 possible portfolios of 30 stocks drawn from the S&P 500. The authors extend an existing linear clones approach and introduce a new sequential oscillating selection method to produce a computationally efficient inference. Such techniques could inform efforts to detect fund window dressing of disclosure statements or to adjust market positions in advance of major fund disclosure dates. Themore »authors test the approach by tasking the algorithm with inferring the constituents of exchange-traded funds for which the components can be later examined. Depending on the details of the specific problem, the algorithm runs on consumer hardware in 8 to 15 seconds and identifies target portfolio constituents with an accuracy of 88.2% to 98.6%.« less