Robot traders can prevent extreme events in complex stock markets

Abstract

If stock markets are complex, monetary policy and even financial regulation may be useless to prevent bubbles and crashes. Here, we suggest the use of robot traders as an anti-bubble decoy. To make our case, we put forward a new stochastic cellular automata model that generates an emergent stock price dynamics as a result of the interaction between traders. After introducing socially integrated robot traders, the stock price dynamics can be controlled, so as to make the market more Gaussian.

Cowboying Stock Market Herds with Robot Traders

“…We advanced a similar rule in a previous work (Suhadolnik et al, 2010). Here, in contrast, we abandoned the unrealistic assumption that the human agents are directly influenced by the robots through imitative behavior 8 .…”

“…To account for the complex nature of stock markets, we propose the use of a system of trading algorithms, or robot traders, as described in Suhadolnik et al (2010). Robot traders have been around for years, but used only for private gain.…”

Why Not Use Robots to Stabilize Stock Markets?

“…How to pay for the costs of the contrarian robot-trading system still needs refining. One implicit implication of our analysis [1] was that 20 percent of the total market turnover would give the necessary resources, because we found that 20 percent of robots were enough for stabilizing. Obviously, this is too expensive for the taxpayer.…”

“…My students and I have been suggesting a method for preventing bubbles and crashes in stock markets, other than using monetary policy and financial regulation, which may be ineffective anyway, as we argue [1]. The approach involves setting up a system of "robot traders."…”

“…Socially integrated autonomous robots, perceived as conspecifics by the group of cockroaches and acting as interactive decoys, were able to control their self-organized group choices of shelter. Inspired by this, my students and I then suggested the use of socially integrated robot traders in stock markets to function as an anti-bubble decoy [1]. We borrowed from such models of cockroaches finding a shelter but also from those of information transfer in fish shoals, and applied their modeling principles to the stock market.…”