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What is a zero-intelligence trader?

Zero-intelligence trader

It’s not a comment on your own trading ability. It’s actually a hi-tech financial market model that assumes traders don’t act rationally. An algorithmic trader replaces a human trader and submits buy or sell orders randomly.

Where have you heard about zero-intelligence traders?

This type of trading model has been found to closely mirror the behaviour of the London Stock Exchange, so could be useful in real financial markets. It was first introduced by economists Gode and Sunder in 1993.

What you need to know about zero-intelligence traders.

Most models of financial markets are based on the belief that traders are intelligent and have access to all the information they need. They're then finely tuned to take into account that these assumptions aren’t always true.

But the zero-intelligence approach begins with random agents. Buyers and sellers are randomly paired up, and randomly propose a price they find acceptable. If the buyer's offer is higher than the seller's asking price, the deal is carried out, and both agents leave the market. The random hook-ups continue until no further transactions are possible.

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