We know this from driving cars — human beings can only react so fast.This fact also applies, obviously, to driving the market. Human beings can still only move so fast, but the financial industry is calling for vehicles that move faster and faster. A group of professors and researchers got together to think out exactly what that means.
Their findings were published in a paper called ‘Financial black swans driven by ultrafast machine ecology’ (h/t NY Observer). In it, they discuss their analysis of 18,520 ultrafast black swan events that occurred in the market from 2006 to 2010. Financial institutions, they said, were most vulnerable to such events.
That’s one piece of bad news, and here’s the other: the researchers conclude that humans will be phased out of the practice of trading entirely. From the paper:
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 characterised by frequent black swan events with ultrafast durations
It’s a matter of reaction time, the more the machine is able to outpace a human, the more irrelevant a human decision becomes. The report uses chess as an example to illustrate this point:
A chess grandmaster takes approximately 650 milliseconds to realise that her king is in
checkmate — hence even if a human trader is as attentive and capable as a chess grandmaster, it
would take him 650 milliseconds to realise he is in danger of losing (i.e. king is in checkmate
20,21) before actually making a move to buy or sell. Given that a market is a collection of autonomous human and machine (i.e. computer algorithm) agents watching the latest prices before their next move, and yet human beings have limitations on how fast they can notice a particular situation and act on it, it is reasonable to interpret the transitions in Fig. 2 as reflecting the decreasing ability of human beings to influence price movements at smaller timescales.