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Is LLM a market taker?

Pixabay — sergeitokmakov

In the ever-evolving landscape of financial markets, technology has become an indispensable tool for traders seeking an edge. With the emergence of Language Models (LMs) powered by artificial intelligence, the realm of trading has witnessed a significant transformation.

Market Makers vs. Market Takers – CME Group

Look at the two different kinds of traders: market makers and market takers, and how there trading patterns differ.

www.cmegroup.com

These LMs, often referred to as Large Language Models (LLMs), are trained on vast amounts of data and possess the capability to process and generate human-like text, making them valuable assets in the trading world.

For those who have some trading experience, my bet is that you are always interested in finding out what the market maker thinks, as they are more than often right aka profitable.

In this experiment, I will be using a multi-modal capabilities of Anthropic’s Claude Sonnet model via Amazon Bedrock to conduct a test to see whether the view is consistent, and most importantly, to find out whether they are market makers or market takers

USD/JPY Weekly chart (14 Mar 23) — TradingView

Here is the prompt

Provide an analysis on the anticipated direction of the upcoming trend — whether it will be upward, downward, or remain relatively stable around the current price level. Additionally, include a detailed justification for the expected trend projection

and the response :

Based on the chart displaying the U.S. Dollar/Japanese Yen currency pair, the recent price action suggests a potential downward trend in the near future. The chart shows that after reaching highs around 152 in late 2022 and early 2023, the price has been experiencing a gradual decline, with the current level trading around 147.664.

The primary justification for this anticipated downward trend projection is the formation of lower highs and lower lows on the chart, which is a typical characteristic of a downtrend.

Despite some temporary upward movements, the overall price trajectory has been sloping downwards, indicating potential bearish momentum. Additionally, the recent price action shows a series of lower peaks, suggesting that buying pressure is diminishing, and sellers are taking control of the market. This could lead to further downside if the selling pressure persists.

However, it’s important to note that technical analysis alone may not provide a complete picture, and fundamental factors such as economic data, central bank policies, and geopolitical events can also influence currency movements. Therefore, it’s crucial to monitor these factors in conjunction with technical analysis to make informed trading decisions.

It’s also worth mentioning that the chart represents historical data, and past performance is not necessarily indicative of future results. The trend can change direction at any given time, and traders should exercise caution and implement proper risk management strategies.

To test whether the LLM view is consistent, here is a slightly tweaked prompt

Provide an analysis on the anticipated direction of the upcoming trend — whether it will be upward, downward, or remain relatively stable around the current price level. Additionally, include a detailed justification for the expected trend projection. If I have $1 left today, what is my best bet and should I consider the interest spread in between the pairs?

and the response :

Based on the provided USD/JPY currency pair chart, the trend appears to be downward in the near-term. The price has recently broken below the 147.664 support level and is currently trading around 147.120 as indicated on the chart.

The justification for this expected downward trend projection is the formation of a potential double-top pattern around the 151–152 price level, which is a bearish reversal pattern. Additionally, the recent price action shows a series of lower highs and lower lows, which is a characteristic of a downtrend.

However, it’s essential to note that technical analysis should be combined with fundamental analysis and risk management principles for effective trading decisions.

Regarding your query about having $1 left and considering the interest rate spread, since you have a limited amount of capital, it may not be advisable to trade forex currencies directly. The interest rate differential between currency pairs is typically more significant for larger trade sizes due to the leverage involved in forex trading.

Instead, with $1 remaining, a more suitable approach could be to invest in fractional shares of stocks or ETFs that align with your risk tolerance and investment objectives. This would diversify your exposure and potentially offer better returns compared to trading forex with such a small capital base.

Ultimately, it’s crucial to have a well-defined trading plan, proper risk management strategies, and a thorough understanding of the market dynamics before entering any trade or investment.

The responses were consistent as they suggested potential downtrend momentum, accompanied by respective justifications, with adequate caution not to rely solely on technical analysis to determine its potential direction.

With reference to the tweaked prompt, it does display some logical understanding, although given that the interest spread between USD and JPY is huge, with only $1 in capital, it barely accumulates any advantage on our end.

Here, the LLMs also demonstrate traits of market takers in certain instance. They rely on existing market data and information to generate responses, essentially accepting the current market conditions and prices as given. Like market takers, they react to market movements and adjust their responses accordingly, without actively influencing prices or providing liquidity.

Hence, the lesson here is that multi-modal LLM can assist to act like quick reference — with its justification to aid your decision.

The need of human in the loop is very much needed as there are still other factors to consider like updates on the economic data, central bank policies, and geopolitical events. With that being said, we can have this factor in as well to give a holistic opinion.

However, in my view, this is more of an art than a science. Use it responsibly

https://medium.com/@andrewlimyh/is-llm-a-market-taker-fba91e0adda6

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