Financial black swans driven by ultrafast machine ecology
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 tr...
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| Main Authors: | , , , , , , |
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| Format: | Journal Article |
| Language: | English |
| Published: |
07-02-2012
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| Subjects: | |
| Online Access: | Get full text |
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| Summary: | 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. |
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| DOI: | 10.48550/arxiv.1202.1448 |