Financial black swans driven by ultrafast machine ecology

"ABSTRACT

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 emerge4-19. 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 Crash4. However, little is known about what lies ahead in the crucial sub-second regime where humans become unable to respond or intervene sufficiently quickly20,21. 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..."

at http://arxiv.org/ftp/arxiv/papers/1202/1202.1448.pdf

Silver Manipulation Caught in the Act; HFT Swamps NASDAQ with 75K SLV Sell Orders Per Second

"Ironically, just days after noted analyst Ted Butler came on the show to explain how silver and other markets are manipulated through the use of high frequency trading, the real-time data feed company, Nanex, showed how the silver ETF (SLV) was forced downwards by a rapid number of machine-generated quotes exceeding a rate of 75,000 per second. Before you start to think that this was merely a bunch of people hitting the sell button all at once, consider this: They were all launched within the space of 25 milliseconds—ten times faster than you and I can blink!

Here’s a chart of the second by second market activity in SLV where you can see the massive lightning-quick spike occurring at 13:22:33.

Source: Nanex

Ted Butler Explains the Whole Process

"What's happening is that these commercials [or large traders], through HFT, can set the price suddenly down. It didn’t go down because there was massive selling from the commercials, they just set the price down. They know how to do it with their computers by putting in actual orders, and faking it, and spoofing, canceling them right away; but what happens is when the price moves down then the selling comes, which is the intended effect and result. Commercials basically put the price down in order to set off stops because everybody seems to be some type of technical trader in the market that reacts to prices."

(Click here for interview and full transcript)

Of course, this isn't just limited to the extremely emotional gold and silver markets. A new study released last month, Financial Black Swans Driven by Ultrafast Machine Ecology, looked at 600 different markets around the world and found that these sort of events happen routinely. Over the most recent five years of market data analyzed, 18,520 crashes and spikes occurred at a speed far exceeding human origin.

Making Money from Human Emotion

So what is going on here you might ask? Like the premise of Robert Harris' new fictional sci-fi thriller, The Fear Index, it appears that mathematicians have figured out a way to make money off human emotion. Then again, this really isn't anything new. One very old trick for doing this, as Ted Butler mentions, is by triggering sell-stops. As it turns out, millions of investors around the world reveal their emotional tolerance for how far a stock can vary before automatically buying or selling at a set price. With access to such highly valuable information, one could make a killing by simply preying on the emotional levels of human greed and fear revealed by investors tipping their hand, so to speak, to the market. Of course, analyzing such data with pattern recognition software has advanced light-years since stop-losses were born. That's kindergarten compared to what they're doing now.
As Robert Harris says regarding the technology he imagined, "What they've done in my book is developed an algorithm that can predict the markets by analyzing the incidence of fear related words on the internet—trends on Facebook, Twitter—a sense of the mood. I thought I was making this all up but, of course, I then discovered this is yesterday's news—they've been doing this for years! There's nothing you can invent that these guys, very clever, haven't thought up before you."

at http://www.financialsense.com/contributors/cris-sheridan/silver-manipulation-caught-in-the-act-hft-nasdaq-slv

Catching The "Silver Crusher" Algorithm In The Act

"There was a time when catching the silver "whack-a-mole" algo, or process, or intervention, or manipulation, or whatever one wants to call it, in action was a myth: an urban legend, perpetuated by silver conspiracy theorists. Until today that is. Courtesy of Nanex we now have direct evidence of just what the reflexive market (in which derivative products such as ETFs influence underlying assets) goes to town by taking silver to the woodshed at a whopping 75,000 times per second! From the broken market sleuths at Nanex: "On March 20, 2012 at 13:22:33, the quote rate in the ETF symbol SLV sustained a rate exceeding 75,000/sec (75/ms) for 25 milliseconds. Nasdaq quotes lagged other exchanges by about 50 milliseconds. Nasdaq quotes even lagged their own trades -- a condition we have jokingly referred to as fantaseconds." Translation: so desperate was the desire to crush silver at precisely 13:22;33, that the Nasdaq order flow directive ended up moving faster than light. Frankly, we don't know about you, but when someone is willing to bend the laws of relativity, just to get a cheaper price in silver, to perpetuate a failing monetary system or for any other reason, we quietly step aside..."

From Nanex:

SLV 1 second interval chart showing trades colored by reporting exchange.

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at http://www.zerohedge.com/news/catching-silver-crusher-algorithm-act