An Agent-based Model of the Nasdaq Stock Market: Historic Validation and Future Directions

This paper presents an agent-based model of a dealer-mediated market, similar to Nasdaq . We outline the overall model and representation of the market rules and order handling infrastructure, as well as representation of individual market-makers decision-making processes and strategies. The original model was created primarily to understand the effects of the then forthcoming decimalization. We discuss our original predictions on effects of decimalization and the subsequent market evolution, and the fact that predatory strategies have become more wide spread since the decimalization. We further outline the applicability of the model to represent the high frequency algorithms and effects of their interactions on the market dynamics.