Leanne J. Ussher

"Margins and Transaction Taxes in an Artificial Speculative Futures Market"

This paper creates an artificial stock market, from a minimalist heterogeneous agent model of futures speculation on a non-storable commodity, with real time gross settlement. All agents have risk neutral preferences and stochastic adaptive expectations according to different trader types – fundamentalist, chartist, or noise trader. Market clearing is consolidated through a Walrasian auctioneer, similar to a call auction mechanism.

Price volatility and trader wealth are explored for different margin requirements and transaction taxes. It appears that margins and transaction costs help procreate large traders who adopt the behavior of “market makers” imposing a spread on their buying and selling. The dominance of the market by a few large traders both reduces local price variation about the mean but increases extreme price movements, and hence overall kurtosis of returns.

These large traders influence prices and can promote the prevalence of multiple equilibria in the market, adding to price volatility and compromising market efficiency and integrity. The possibility for multiple equilibria is due to the margin account which is valued in the speculative futures market simultaneously with trader positions due to real time gross settlement. This creates a positive feedback between agent wealth and prices. Walrasian clearing, limits such destabilizing trades that may arise from margin calls in times of market stress. But this kind of volatility increases when market speculator expectations are not uniform and/or individual traders become large relative to the market.

In this simple stochastic price model, where all traders have minimal intelligence, lucky traders can grow into large traders and persist for a medium length of time, beyond what their knowledge deserves. Trader wealth distributions become skewed and usually have power law tails. This tendency for large traders to emerge appears to exist regardless of market size. Cumulative tendencies, due to the leverage opportunities from margins and existence of transaction costs on trading, appear to reduce the competitiveness of the market.

The setting of the margin requirement by an exchange is shown to affect the prevalence of large traders. Large traders and extreme price movements appear to be less in either a very low or very high leveraged market. Furthermore, transaction taxes increase local variation of price movements, although they may reduce larger price movements in low levered markets. This artificially generated market provisionally identifies some potentially tractable optimal exchange policy, supportive of more stable and competitive trading rules.

JEL Codes: G13, G18, D84
Keywords: Agent-based modeling, futures, speculation, margins, transaction tax.

"Intraday Continuous Double Auction in a Speculative Futures Market"

Futures market price quotes and transaction prices are derived endogenously in an artificial market with bilateral trading via a continuous double auction. The market participants have different strategies and reasons for trading futures. Hedgers, speculators and scalpers, with heterogeneous expectations, produce a bid-ask spread and mid-price from bilateral exchange that converges to the theoretical Walrasian price and is always mean reverting. Risk neutral speculators try to maximize profit, while being bound by margin requirements, trading costs and real time gross settlement. We find that the bid-ask spread can be derived without market makers, and speculators compete with each other reducing the spread to their cost of transacting. Trading opportunities, or market liquidity, increases when margins and taxes are low. The amount of trading declines when margins and taxes are high, however prices appear to be more efficient as trading volatility is less. Raising transaction costs increases the number of limit orders from speculators and this in turn helps stabilize the market. Scalpers who enter the market make a profit by offering immediacy, and thereby liquidity. However scalpers can increase trading volatility by supplying liquidity to destabilizing speculators who are called on to make margin calls.

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“Microfoundations and the Marginalist Revolution," with Gonçalo L. Fonseca
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February 1998

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Mimeo for the Transformational Growth and Full Employment Project, March 1998

“Do Budget Deficits Raise Interest Rates: A Survey of the Empirical Literature"
Working Paper, no.3. Transformational Growth and Full Employment Project, April 1998