Trading strategies, feedback control and market dynamics

Markets have internal dynamics leading to stilized facts, such as fat-tails in price fluctuations and long-run memory. In this paper, we use a nonequilibrium price formation rule to explore feedback effects in trading strategies and market dynamics. By interpreting trading strategies as a feedback controller, we show that (a) trend followers can lead to oscillatory phenomena, and (b) adaptation mechanisms are necessary in order prices track values.