Recently I a mentioned a modelling paper (doi:10.1038/nature08932) on cascading failure in connected networks, that shows that feedbacks between connected networks can destabilize two stable networks.

This type of dynamic appears to be the cause of last weeks stock market plunge.  At least according to the article  Haphazard Trading Network Draws Focus of Wall St. Inquiry the New York Times writes:

Investigators seeking an explanation for the brief stock market panic last week said Sunday that they were focusing increasingly on how a controlled slowdown in trading on the New York Stock Exchange, meant to bring about stability, instead set off uncontrolled selling on electronic exchanges.

It was an unintended consequence of a system built to place a circuit breaker on stocks in sharp decline. In theory, trades slow down so that sellers can find buyers the old-fashioned way, by hand, one by one. The electronic exchanges did not slow down in tandem, causing problems, according to two officials familiar with the investigation.

According to Newsweek’s Wealth of Nations blog  The Computer Glitch Felt Round the World:

… computer-driven trading algorithms that now account for more than 60 percent of all stock-market volume in the U.S. While high-frequency trading certainly brings efficiencies to equities market, it can also exaggerate things enormously. When you’re dealing with such volume and speed, movements can be bigger and faster than predicted. Today’s volatility is an interesting blip in the yearlong debate over whether high-frequency trading is a dark, sinister practice that needs to be reigned in, or a benign technological evolution.

Science fiction author and design critic, Bruce Sterling has a more colourful description of the current situation as the Invisible Crazy Robot Hand

*Nobody is less surprised than me to see that interacting pieces of software can do weird emergent stuff, and act all buggy. This is not, like, some surprising discovery. It’s more like a law of computational physics.

*For the stock market to go into a “tornado” of dark pool trading is not all that great, though. Especially when days tick by, and nobody knows what the hell actually happened. This is not a chaos-theory lab experiment: this is supposed to be the bedrock of global capitalism.