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 companys 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.
Following the May 2010 event, U.S. regulators, as a safety mechanism, upheld circuit breakers designed to stop trading if a stock price makes a sudden large move. Whether or not that is the best solution around, considering the speed in which todays machine trading can occur, does not convince all market experts. At that level of resolution, one of the study authors said it was troublesome to even observe, leave alone regulate.
The authors suggest an early warning system for when the markets are becoming unstable. According to a Wired report, the authors would like to see an approach that might help steer automated markets by introducing rogue algorithms when herd behaviors appear imminent.
In a recent Q&A interview, Johnson said the fracture analogy to real materials is useful in assessing todays financial markets. Where we want to head to is the analogy of a trained aircraft engineer, who can pretty much look at the microscopic arrangement of small fractures in an aircraft and judge whether it is safe to continue flying that plane or not. To have this for markets would be an incredibly important step toward understanding, and managing, risk."
Explore further:
US imposes new rules on high-speed traders
More information: Financial black swans driven by ultrafast machine ecology, by Neil Johnson, Guannan Zhao, Eric Hunsader, Jing Meng, Amith Ravindar, Spencer Carran, Brian Tivnan, arXiv:1202.1448v1 [physics.soc-ph] arxiv.org/abs/1202.1448
Abstract
Society's drive toward ever faster socio-technical systems, means that there is an urgent need to understand the threat from 'black swan' extreme events that might emerge. On 6 May 2010, it took just five minutes for a spontaneous mix of human and machine interactions in the global trading cyberspace to generate an unprecedented system-wide Flash Crash. However, little is known about what lies ahead in the crucial sub-second regime where humans become unable to respond or intervene sufficiently quickly. Here we analyze a set of 18,520 ultrafast black swan events that we have uncovered in stock-price movements between 2006 and 2011. We provide empirical evidence for, and an accompanying theory of, an abrupt system-wide transition from a mixed human-machine phase to a new all-machine phase characterized by frequent black swan events with ultrafast durations (<650ms for crashes, <950ms for spikes). Our theory quantifies the systemic fluctuations in these two distinct phases in terms of the diversity of the system's internal ecology and the amount of global information being processed. Our finding that the ten most susceptible entities are major international banks, hints at a hidden relationship between these ultrafast 'fractures' and the slow 'breaking' of the global financial system post-2006. More generally, our work provides tools to help predict and mitigate the systemic risk developing in any complex socio-technical system that attempts to operate at, or beyond, the limits of human response times.
thingumbobesquire
Callippo
PussyCat_Eyes
With automation & other technology comes responsibilities that are not always put in practice. It's not supposed to benefit ALL people, just the ones who invest in companies. A company that is failing, like Solyndra, deserved for its investors to pull out instantly, even though government invested heavily in it with taxpayer money. The remaining investors, if they saw that the company was failing, would have been fools to not sell immediately. Waiting is financial suicide.
kaasinees
Corruption runs very deep. Much deeper anyone realizes.
kochevnik
There is no speed limit on news.
Eric_B
These events are governed by cause and effect...
Machine trading is both the biggest factor in these markets and the only method that can catch these events for the short and long.
How exactly could these events be "common" as the article states and not be making the front page of the wall st journal etc, reported as a threat to the market, if they aren't manipulated occurrences being carried out by multimillion and billion dollar entities?
pardon my tinfoil hat but, we won't be hearing anything of substance any time sooner than we hear about pre-911 short sales.
PussyCat_Eyes
julianpenrod
More follows this.
julianpenrod
More follows this.
PussyCat_Eyes
Interests of Society?? ROFLOL.....Are you saying that, i.e., if I invest MY $20,000 in a stock that I have complete confidence in, whether or not the company makes money for me, the gains that my investment earns belongs to society and not just ME?? I suggest you go to a shrink and have your head examined.
julianpenrod
But the concept of "flash transactions" overall must be called into question. Transactions that take faster than humans react can completely undermine the idea of complete transparency as to one's own account.
More follows this.
julianpenrod
More follows this.
julianpenrod
PussyCat_Eyes
You can ask that question of any American politician, Democrat or Republican, whether in the House or Senate. Ask Nancy Pelosi how she and her husband got their fortune. Also, how is it that Obama appoints tax cheats like Geithner as Sec. of the Treasury? And while you're at it, ask why Attorney General Eric Holder is not forthcoming with the truth about "Fast and Furious". SOMEONE has to go to jail!! There are far more serious corruption issues to consider and resolve in American politics that will bring American "society" down than whether or not I buy shares with MY $20,000.US and then sell those shares a minute later because I discover suddenly that someone in that company is a jerk who made the wrong move and my money is in dire jeopardy if I don't do something quick. I am nobody's fool, thank you.
explainer
plasticpower
Musashi
George_Rodart
NEW YORK -- Shares of Ambac plunged 33% Tuesday after the embattled bond insurer said it may be forced to file for bankruptcy protection.
In a filing with the SEC late Monday, the company said it believes it has sufficient liquidity to get through the second quarter of 2011, but warned it could run out of money sooner.
So someone knew something, or feared the bankruptcy risk, or couldn't stomach the volatility, and sold regardless of the price offered.
Tue-11-10,1.11,1.12,0.75,0.79-0.39 -33.1% 110281600
Mon-11-09,1.22,1.22,1.17,1.18+0.01 -0.80%, 15720000 <-chart date
Fri-11-06,1.15,1.20,1.12,1.17-0.03 -2.50% ,18976200
Thu-11-05,1.44,1.44,1.16,1.20-0.30 -20.0%,63244300
Wed-11-04,1.43,1.62,1.36,1.50+0.39 +35.1%,91888300
Tue-11-03,1.03,1.13,1.02,1.11+0.06 +4.8% , 8523400
Mon-11-02,1.15,1.15,1.01,1.05-0.10 -8.7% ,10065800
Fri-10-30,1.17,1.20,1.08,1.15,14297000
Doctor Dow
...Your point is Relative From a view that I will ANALOGIZE....
( Where there is smoke there is fire" ) Your viewing of the market is as a hiker seeing smoke from along distance..say from a side of a mountain .. looking with the human eye a 1/2 mile away in the distance ..You can see smoke and a glow... But there is more data of the market place ..Your missing many variables..
1)Is it a controlled fire, and ...How many people are tending it,sitting around viewing it .. ..And so on....
Doctor Dow
kochevnik
SemiNerd
Simply requiring that stocks be held for an hour or a day would eliminate most of these types of manipulation. Another idea would be to force a lag time of a few seconds with a randomly added interval for stock price reports.
SemiNerd
This will reduce liquidity some, so the actual tax rate would have to be adjusted so it would have minimal negative effects, but the positive effect would be less volatility.
kochevnik
I see two problems. First Goldman Sachs has execution orders for much of the market, and they did not lose a single day in 2010 as a result of that inside information. Second, flash crowds drive down a smaller cap stock, panicking others to sell, then buy at that low,low price. This happens because of limited liquidity of the market and of small cap stocks in particular. I personally know of people doing this.