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

ArXiv ID: 2405.02849 “View on arXiv”

Authors: Unknown

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.

Keywords: Multi-agent simulation, Over-the-counter markets, Government bonds, Market structure, Agent-based modeling

Complexity vs Empirical Score

• Math Complexity: 4.0/10
• Empirical Rigor: 2.5/10
• Quadrant: Philosophers
• Why: The paper uses agent-based modeling concepts (like utility functions and market structure) but presents minimal advanced mathematical derivations, focusing instead on conceptual mechanisms; empirical backing is limited to high-level macro data and simulation design without backtests, datasets, or statistical metrics.

  flowchart TD
    A["Research Goal:<br>Model Opaque Bilateral<br>Market Dynamics for<br>Australian Gov Bonds"] --> B["Methodology: Multi-Agent Simulation<br>Small-scale Meta-heuristic Methods"]
    B --> C["Data & Inputs:<br>Heterogeneous Agents<br>Bank-to-Bank (OTC) Structure<br>Limited Number of Agents"]
    C --> D["Computational Process:<br>Agent Interactions<br>Negotiated Transactions<br>Market Rigidity Simulation"]
    D --> E["Outcomes:<br>Insights on Market Stability<br>Impact of Market Rigidity<br>Understanding OTC Dynamics"]