Light-bulb moment for stock market behaviour

July 21, 2016, University of Adelaide
Light bulb
Source: Wikimedia Commons

University of Adelaide physicists have discovered that the timing of electronic orders on the stock market can be mathematically described in the same way as the lifetime of a light bulb.

The surprising finding is a "crucial first step" towards predicting dramatic movements on stock exchanges that could lead to stock market crashes.

The two University of Adelaide physicists, in collaboration with colleagues in the German finance sector, analysed the arrival and cancellation times of many millions of buy and sell 'limit orders' from seven different stocks on the electronic orderbook of the London Stock Exchange over a period of four months.

The seven stocks were chosen to represent the full gamut of stocks from those traded rapidly in large volumes such as Rio Tinto through to Yellow Pages which are traded much less frequently.

The results, published in the journal Physics Letters A, showed remarkable and unexpected behaviour.

"We found that when we looked at orders that came in extremely close together, less than 10 milliseconds apart, there were a huge number of orders placed and withdrawn that don't satisfy any rational formula that we could see at all," says Professor Anthony Thomas, Australian Laureate Fellow and Elder Professor of Physics at the University of Adelaide.

"It appears that in these cases, what's going on is some attempted market manipulation through fake orders to try and suggest that the market is moving when it's not.

"However, when we excluded all the orders of less than 10 millisecond intervals, we found the market actually shows amazingly rational behaviour. In fact the pattern of placement and removal of orders then follows a well-known probability distribution, the Weibull distribution.

"And even more surprisingly the shape of the distribution is the same for all the stocks we studied – a shape that corresponds to 'maximum entropy' or, in other words, maximum disorder.

"This is a major discovery, telling us about the dynamics of the electronic orderbook."

Research Associate Dr Ayse Kizilersü says one example of Weibull distribution is the life-time of a . "The finding that the stock market activity can be described in this same way may lead us to being able to determine how likely dramatic events such as are," says Dr Kizilersü.

"Perhaps then the information can be used to properly manage the risks associated with investing. For example, regulators could detect irregularities in movements which would leave the small investors at a disadvantage, such as market abuse."

The researchers plan to continue their research looking at price movements.

Explore further: Buying high in the stock market caused by overconfidence

More information: Ayşe Kızılersü et al. Universal behaviour in the stock market: Time dynamics of the electronic orderbook, Physics Letters A (2016). DOI: 10.1016/j.physleta.2016.05.035

Related Stories

Buying high in the stock market caused by overconfidence

April 11, 2016

The golden rule for investing has always been "buy low, sell high." Past research has shown that many people make the common investing mistake of selling stocks at a low price after the stock market has experienced a decline. ...

Who sells when the market is down?

May 25, 2016

During the darkest days for investors after the 2008 financial crisis that swallowed Lehman Brothers up like a sinkhole, the common wisdom was to hold tumbling shares and wait for better days.

Recommended for you

Information engine operates with nearly perfect efficiency

January 19, 2018

Physicists have experimentally demonstrated an information engine—a device that converts information into work—with an efficiency that exceeds the conventional second law of thermodynamics. Instead, the engine's efficiency ...

Team takes a deep look at memristors

January 19, 2018

In the race to build a computer that mimics the massive computational power of the human brain, researchers are increasingly turning to memristors, which can vary their electrical resistance based on the memory of past activity. ...

Artificial agent designs quantum experiments

January 19, 2018

On the way to an intelligent laboratory, physicists from Innsbruck and Vienna present an artificial agent that autonomously designs quantum experiments. In initial experiments, the system has independently (re)discovered ...


Adjust slider to filter visible comments by rank

Display comments: newest first

1 / 5 (1) Jul 21, 2016
The stock market never crashes! It always goes up over time. No matter what, the stock market will never be lower than it is today if you go forward into the future. This is due to inflation. Every country's central bank and monetary policy advisors always make it a strict priority to stimulate inflation except during downturns, which never last as long as expansionary periods. This is all due to the simplicity of creating inflation by monetary easing policies. It is very easy to create more money out of thin air, but it is very difficult to contract and deflate without causing severe depression. If you ran the federal reserve would you rather create massive inflation after a long period of time, with debt, or ruin the country's economy by deflating? That is the question. The inflation is always present as you move forward in time, no matter what! Countries however do eventually implode on their debt due to the inflation creation, but that is an unavoidable consequence.
1 / 5 (1) Jul 21, 2016
One thing to remember is right now the U.S. economy is doing very well, the stock market is at all time highs and unemployment is at all time lows. This cannot last forever, but it might last longer than you might think. The good times could end tomorrow or they could end in 2030, nobody but the 1% and the policy makers know the answer to that question. But, one thing to remember is when the next recession hits in the next 1-30 years, it will never get as bad as bloggers online might say it will get. The same goes for the good times. Many news sites promote fear by exaggerating numbers and predictions. When the next recession hits, you will hear "The end times are coming." "Move out of the U.S. now before it implodes." Always remember, the same people said that last time during the recession and we made it out just fine. Stocks aren't going to zero! This is all due to inflation. Forget trying to make money in the market short term, go long term and you can't lose.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.