**Slide 1**

**Modeling liquidity, risk
and transaction costs in the LSE using low intelligence agents**

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**Goals**

**Why economics is hard**

**Alternative**

**A few seminal papers
**

illustrating zero intelligence

**Three models**

**Continuous double auction**

**Patient trading**

**Impatient trading**

**Order cancellation**

**Limit order collaborators 1**

**ZI model **

(Unrealistic but somewhat tractable)

**Achievements of ZI model so
far**

**Comparison to LSE data**

**London screen**

**Upstairs, downstairs**

**Slide 19**

**Parameters of model**

**Testing prediction of
spread**

**Predicted price diffusion
rate**

**Top 10 Russian jokes, Oct.
23, 2003**

**Volatility autocorrelation**

**Fat tails in prices**

**Price fluctuations have fat
tails**

**Investigation of fat tails**

**Price changes are almost
**

independent of volume

**A typical large price
change**

**Gap distribution
vs.**

price distribution

**Tail exponent of rtns. Vs.
gap**

**Return vs. number trades**

**Building a better empirical
model for real order flow**

**Autocorrelation of orders**

**Unconditional order
placement distribution**

**Distribution of relative
limit price conditioned on spread**

**Limit order placement
conditional on spread**

**Empirical model**

**Ecology of arbitrage**

**Market ecology**

**Building a market ecology**

**Two low intelligence agents**

**Profits vs. agent trading
volume**

**The road to efficiency is
not straight**

**Practical implications**

**Conclusions**

**Upstairs, downstairs**

**Price changes are almost
**

independent of volume (NYSE)

**Market (price) impact**

**Market impact fn- dim units**

**Market impact fn- non dim
units**