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May 6th – Signals from a Very Brief but Emblematic Catastrophe on Wall Street

Paul A. David

Stanford University - Department of Economics; University of Oxford - All Souls College; UNU-MERIT (Maastricht)

June 27, 2010

This essay begins by looking closely at the underlying structural causes of the discontinuity that appeared in the behavior of the U.S. stock market at 2:40pm in the afternoon of 6th May 2010, because the emblematic “catastrophic” aspect of the collapse of equity prices, and their subsequent equally abrupt rebound, renders these events potentially informative about things that can happen in a wider array of dynamical systems or processes – including those with consequences about which there is cause for serious concern. What transpired in those 7 minutes is viewed as being best understood as a hitherto unrecognized “emergent property” of structural conditions in the U.S. national stock market that all the actors in the story collectively had allowed to come into existence largely unremarked upon, through an historical process that was viewed generally as benign and therefore left to follow its own course of evolution unimpeded. The deeper significance of the events of May 6th lies in the attention it directs to the difference between a society being able to create and deploy technical “codes” enabling greatly enhanced connectivity for “exchange networks” – the condition of “hyper-connectivity” among an increasing number of its decentralized sub-systems, and a society that also provides timely mutually compatible institutional regulations and administrative rules for the coherent governance of computer-mediated transactions among “community-like” organizations of human agents. Regulating mechanisms operating to damp volatility and stabilize systems in which there is beneficial positive feedback are considered, as are a variety of circumstances in which their absence results in dysfunctional dynamic behavior. It is suggested that in view of the growing dependence of contemporary society upon on-line human-machine organizations for the performance of vital social and economic functions, continuing to focus resources and creative imagination upon accomplishing the former, while neglecting the latter form of “progress” is a recipe for embarking upon dangerous trajectories that will be characterized by rising systemic hazards of catastrophic events of the non-transient kind.

Number of Pages in PDF File: 28

Keywords: stock markets, price volatility, catastrophe theory, positive feedback, high frequency trading, computer-mediated transactions, system governance, regulatory by-pass, disruptive innovation

JEL Classification: E44, E49, G14, G18, G 28, O33, P17

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Date posted: July 31, 2010  

Suggested Citation

David, Paul A., May 6th – Signals from a Very Brief but Emblematic Catastrophe on Wall Street (June 27, 2010). Available at SSRN: http://ssrn.com/abstract=1641419 or http://dx.doi.org/10.2139/ssrn.1641419

Contact Information

Paul A. David (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650 723-3710 (Phone)
650 725-5702 (Fax)
HOME PAGE: http://www-econ.stanford.edu/faculty/
University of Oxford - All Souls College ( email )
High Street
Oxford, Oxon. OX1 4AL
United Kingdom
44 (0)1865 279299 (Phone)
44 (0)1865 279313 (Fax)
UNU-MERIT (Maastricht) ( email )
Keizer Karel Plein 19
Maastricht, TC 6211
HOME PAGE: http://ccg.merit.unu.edu/
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