Acceleration distributed unevenly across traders can turn safety mechanisms into systemic hazards

Evidence

In a brilliant analysis of what the May 6 flash crash revealed about the current structure and dynamics of electronically mediated markets, Paul A. David highlights the fact that the acceleration enabled by electronic exchanges and computer trading algorithms is very unevenly distributed among market actors and different stock exchanges. This led to a dramatic form of what Rosa, from a sociological point of view, describes as dysfunctional desynchronization. The circuit breakers built into the major electronic exchanges like the New York Stock Exchange (NYSE) worked as they should. But the NYSE, which as recently as 2005 was home to three-fourths of the volume of stock trades on U.S. exchanges, is now only the location of around 30 percent of such trades. The rest mainly occur in a network of relatively unregulated private and unregistered equity trading venues that are, on the one hand, relatively invisible to actors not involved in them (most importantly to the public regulatory agencies like the Securities and Exchange Commission) and, on the other hand, also interconnected with the large, established exchanges that are now equipped with safety catch mechanisms. So when the “circuit breakers” were triggered in the major exchanges like the NYSE, the speculative trading of the relevant stocks simply shifted over to the scores of smaller unregulated, satellite-based electronic exchanges that are connected to the larger exchanges and to each other by dense but nontransparent networks. This had perverse effects on the system as a whole. — Hartmut Rosa, Social Acceleration, 16

Categorization

• XREF: Connects to the trust/forfeitable-bond and private arbitration readings of financial self-governance; also a concrete case of Rosa’s desynchronization thesis possibly being developed elsewhere in this volume. — connects to: Accelerated algorithmic trading causes recurrent flash crashes beyond any regulator’s mastery — Hartmut Rosa, Social Acceleration: A New Theory of…, 15; Systemic risk is emergent and irreducible to the sum of individual risks — Mark Blyth, Austerity: The History of a Dangerous…, 134; Individually rational risk-shifting trades become immoral and systemic-risk threats if widely practiced. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 199 (+5 more)

Broader Connections

• An unaccountable liquidating desk accelerated losses that hit all consensus traders #exemplifies (0.92) — Donald MacKenzie, An Engine, Not a Camera, 1034
• Individually rational risk-shifting trades become immoral and systemic-risk threats if widely practiced. #corroborates (0.88) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 199
• Systemic risk is emergent and irreducible to the sum of individual risks #expands (0.85) — Mark Blyth, Austerity, 134
• Security design boosted cross-market correlation and turned local losses into systemic collapse. #exemplifies (0.85) — Mark Blyth, Austerity, 96
• Micro-foundational safety does not guarantee systemic safety #corroborates (0.82) — Mark Blyth, Austerity, 131
• Fundamentally unrelated market phenomena can suddenly move in lock-step within a global microstructure #exemplifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1088
• Disembedding mechanisms remove control from individuals and create collective risk #expands (0.80) — Anthony Giddens, The Consequences of Modernity, 310