Tags

Related Posts

Share This

Ultrafast Machine Trading Risks Market Crash

In the United States, ultrafast trading in financial markets between 2006 and 2011 was the underlying factor for over 18,000 extreme price changes, according to a new study. Neil Johnson, a professor in the physics department of the University of Miami in Coral Gables, one of the authors of the study, thinks that a buildup of such “fractures” can destabilize the market. This study, “Financial Black Swans Driven by Ultrafast Machine Ecology” was submitted to arXiv earlier this month, suggesting the link between extreme-change fractures and market crashes.

The authors looked at a set of what they call “18,520 ultrafast black swan events” that they uncovered in stock-price movements between 2006 and 2011. A case in point is what occurred on May 6, 2010, when it took just minutes for a spontaneous mix of interactions in cyberspace to generate the Flash Crash, first a plunge, in minutes, and soon after a recovery.

The speed in which the rises and falls occur might last no longer than half a second, unapparent to any human who is tracking prices. Johnson says if you blink you miss it. Flash events may happen in milliseconds and have nothing to do with a company’s real value.

To examine such incidences and their frequency the authors of the study waded through price logs from over 60 markets collected by Nanex, a Chicago company that sells streaming market data. The data revealed that the ultrafast fracture events were not infrequent but common, totaling 18,520 in the 2006 to 2010 time span. The authors looked for extreme changes in a stock price, which they defined as a change greater than 0.8 per cent, over timescales shorter than 1.5 seconds.

The speed in which ultrafast events happen is of concern as human oversight becomes impossible if trades are taking place faster than humans can react. Machine trading today carries computerized trading algorithms that make automated trades in milliseconds and make some experts uncomfortable, in the fear that out-of-control algorithms can cause a crash.

via Study links ultrafast machine trading with risk of crash.

Be Sociable, Share!