Weekend Economists Enumerate the Wealth of Nations, February 10-12, 2012

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33. i stole this from n2doc: Ultrafast Trades Trigger Black Swan Events Every Day, Say Econophysicists

http://www.technologyreview.com/blog/arxiv/27562/?p1=blogs



On 6 May 2010, shares on US financial markets suddenly dropped on average by around 10 per cent but in over 300 stocks by more than 60 per cent. Moments later the prices recovered.

The event mystified economists because they had never seen anything like it (and have enough trouble explaining the ordinary workings of markets). Econophysicists have since blamed this so-called flash crash on the automated behaviour of ultrafast computer trades, which take place in periods measured in milliseconds.

These kinds of trades appear to generate emergent behaviour that has nothing to do with the actual value of a company. Instead, these events are unavoidable properties of the system itself.

That raises an important question: how can authorities prevent flash crashes and price spikes in which billions of dollars can be won and lost?