Note: [1] Disclaimer: The views I express in this research paper are my own and were developed before starting at my current position and do not necessarily reflect those of my current employer or my fellow employees.
Abstract: The Iowa Electronic Markets are small, real-money financial markets designed to aggregate information about future events. The market microstructure of these markets is studied and a market making model is developed to provide liquidity for one set of securities offered by this exchange. A computer program was created to employ the market making model and profit from the market’s inefficiencies. Using invested capital, the system traded 34% of the total market volume and achieved a Sharpe ratio of 9.9. This paper reveals the details of how this algorithmic trader worked to show how it functioned and the value it added to the Iowa Electronic Markets.