A new paper has gone searching through historic trading for these sorts of glitches and ended up finding a lot of—over 18,000, all of which took place too fast for human intervention to have driven them. When they generated a mathematical model of this trading, they found that they showed indications of many traders executing a similar strategy, exactly as you’d expect from automated trading systems. The rise in this style of trading appears to be an emergent property of computerized trading, and it seems to have reached an inflection point near the start of the financial crisis.
…[F]ast trading systems, coupled to a limited number of trading strategies, have caused a fundamental change in the behavior of the stock market. This shift leads to sudden changes in the value of stocks that aren’t linked to any underlying financial factors. (In most cases, the change seems to be transient, and stocks return to their former value rapidly.) What’s not at all clear is what triggers these [ultrafast extreme events], and whether changes in market regulations or trading strategies could eliminate them.
– “Trading bots create extreme events faster than humans can react: Our algorithms now show collective behavior that we do not control” by John Timmer, Ars Technica, 9/15/13
Coming on the heels of Time Magazine’s cover story called “How Wall Street Won: Five Years After the Crash, It Could Happen All Over Again,” this Ars Technica article highlights the technical arms race that could lay the foundation for another crash.
By comparison, the Terminator movies seem almost tame.