Abrupt rise of new machine ecology beyond human response time

Abstract

Society's techno-social systems are becoming ever faster and more computer-orientated. However, far from simply generating faster versions of existing behaviour, we show that this speed-up can generate a new behavioural regime as humans lose the ability to intervene in real time. Analyzing millisecond-scale data for the world's largest and most powerful techno-social system, the global financial market, we uncover an abrupt transition to a new all-machine phase characterized by large numbers of subsecond extreme events. The proliferation of these subsecond events shows an intriguing correlation with the onset of the system-wide financial collapse in 2008. Our findings are consistent with an emerging ecology of competitive machines featuring ‘crowds' of predatory algorithms, and highlight the need for a new scientific theory of subsecond financial phenomena.

Mini-Flash Crashes, Model Risk, and Optimal Execution

“…Anecdotal evidence suggests that there may be over a dozen every day ( [58]). A rigorous empirical analysis uncovered "18,520 crashes and spikes with durations less than 1,500 ms" in stock prices from 2006 through 2011 ( [74]). The exhaustive documentation on Nanex LLC's "NxResearch" site offers further corroboration as well ( [8]).…”

“…A popular definition characterizes a mini-flash crash as an event in which the price of some security changes at least 0.8% and ticks ten times consecutively in a single direction ( [74]). Price swings need not be so mild, though.…”

“…Price swings need not be so mild, though. Johnson et al noted that "both crashes and spikes are typically more than 30 standard deviations larger than the average price movement either side of an event" ( [74]). The SEC also recently described several 99% plunges as "mini-flash crashes" ( [13]).…”

“…For example, due to a bug in the systems at the Tokyo Stock Exchange and a typo in a trade submitted by Mizuho Securities, the share price of the recruitment agency J-Com fell in minutes from 672,000 to 572,000 on December 8, 2005 ([2]). ii) Mini-flash crashes may be caused by the rapid, endogenous formation of positive feedback loops ( [6], [74], [59], [72], [70], [73]). As Johnson et al put it, "Crowds of agents frequently converge on the same strategy and hence simultaneously flood the market with the same type of order, thereby generating the frequent extreme price-change events" ( [74]).…”

“…ii) Mini-flash crashes may be caused by the rapid, endogenous formation of positive feedback loops ( [6], [74], [59], [72], [70], [73]). As Johnson et al put it, "Crowds of agents frequently converge on the same strategy and hence simultaneously flood the market with the same type of order, thereby generating the frequent extreme price-change events" ( [74]). A separate empirical study on the Flash Crash of May 6, 2010, specifically, determined that at its peak, "95% of the trading was due to endogenous triggering effects" ( [59]).…”