Accelerated algorithmic trading causes recurrent flash crashes beyond any regulator’s mastery

Evidence

Although such acceleration does not per se lead to inevitable catastrophe, portents of the potential damage that might result were witnessed on the afternoon of May 6, 2010, when the Dow Jones Industrial Average plunged 700 points in seven minutes. There had not been such a great loss in such a short period of time since the great crash of October 1987. This time, however, after billions in share values had been lost almost in an instant, the market just as rapidly regained its preplunge levels. After “a report traced the main trigger of May’s big crash to a poorly timed trade by a mutual fund in Kansas,” the response of regulators was “to put in place circuit breakers to halt trading and reset prices in case stocks plunge.” Yet since that time there have been scores of “mini flash crashes” of individual stocks. To give just one example, four months later the value of Progress Energy, a 107-year-old utility company with 3.1 million customers and 11,000 employees, dropped 90 percent and was almost wiped out in a matter of seconds. Neither its executives nor active traders in the utility markets had any idea why. It later became clear that “a wayward keystroke by a trader somewhere had unleashed a powerful computer algorithm that had devoured Progress Energy’s stock in moments.” The resulting trades were canceled out and the damage was undone. But many are worried that these phenomena are signs that larger-scale crashes could occur and wreak damaging havoc in electronic markets that are paradoxically both highly integrated and very fractured. — Hartmut Rosa, Social Acceleration, 15

Categorization

• XREF: Connects to the trust-and-market literature (Milgrom, diamond bourse) and financialization readings already in the library. — connects to: Computers multiplied financial instrument complexity and accelerated trading to near light speed. — Yanis Varoufakis, Technofeudalism: What Killed Capitalism, 226; Faster processes get braked by slower ones at synchronization points — Hartmut Rosa, Social Acceleration: A New Theory of…, 277; The 2008 crisis analysis overlooked transaction-speed acceleration as a destabilizing factor — Hartmut Rosa, Social Acceleration: A New Theory of…, 14 (+6 more)

Broader Connections

• Compressed decision time makes financial markets prone to cascading collapse #corroborates (0.90) — David Harvey, The Condition of Postmodernity, 1938
• Flash crash prices so unreliable that 27 percent of trades required cancellation #exemplifies (0.85) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 547
• Acceleration distributed unevenly across traders can turn safety mechanisms into systemic hazards #corroborates (0.85) — Hartmut Rosa, Social Acceleration, 16
• Economists still cannot explain the causes of flash crashes #corroborates (0.82) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 547
• Dark pools and algorithmic trading remain opaque even to most traders #qualifies (0.75) — Aris Komporozos-Athanasiou, Speculative Communities, 92