Vous êtes sur la page 1sur 9

'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

This is Google's cache of http://www.newscientist.com/article/dn6948. It is a snapshot of the page as it


appeared on 11 Feb 2010 01:35:50 GMT. The current page could have changed in the meantime. Learn
more

Full version

SUBSCRIBE TO NEW SCIENTIST


Select a country United Kingdom USA Canada Australia New Zealand Other
Advertising
New Scientist

Physics & Math

Feeds

Login

Username
Password
Remember me

Your login is case sensitive

Forgotten your password?


Subscriber? Register now!

Subscribe now
Institutional Subscribers
Athens login

close

Home

News

In-Depth Articles

Blogs

Opinion

Video

Galleries

1 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Topic Guides

Last Word

E-Newsletter

Subscribe

Look for Science Jobs

SPACE

TECH

ENVIRONMENT

HEALTH

LIFE

PHYSICS&MATH

SCIENCE IN SOCIETY

Home |Physics & Math |Life | News

'Zero intelligence' trading closely mimics stock


market
11:59 01 February 2005 by Katharine Davis

A model that assumes stock market traders have zero intelligence has been found to mimic the
behaviour of the London Stock Exchange very closely.

However, the surprising result does not mean traders are actually just buying and selling at random,
say researchers. Instead, it suggests that the movement of markets depend less on the strategic
behaviour of traders and more on the structure and constraints of the trading system itself.

The research, led by J Doyne Farmer and his colleagues at the Santa Fe Institute, New Mexico, US,
say the finding could be used to identify ways to lower volatility in the stock markets and reduce
transaction costs, both of which would benefit small investors and perhaps bigger investors too.

A spokesperson for the London Stock Exchange says: "It's an interesting bit of work that mirrors
things we're looking at ourselves."

2 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Most models of financial markets start with the assumption that traders act rationally and have access
to all the information they need. The models are then tweaked to take into account that these
assumptions are not always entirely true.

But Farmer and his colleagues took a different approach. "We begin with random agents," he says.
"The model was idealised, but nonetheless we still thought it might match some of the properties of
real markets."

Buying and selling

In the model, agents with zero intelligence place random orders to buy and sell stocks at a given price.
If an order to sell is lower than the highest buy price in the system, the transaction will take place and
the order will be removed - a market order. If the sell order is higher than the highest buy price, it will
stay in the system until a matching buy order is found - a limit order. For example, if the highest order
to buy a stock is $10, limit orders to sell will be above $10 and market orders to sell will be below
$10.

The team used the model to examine two important characteristics of financial markets. These were
the spread - the price difference between the best buy and sell limit orders - and the price diffusion
rate - a standard measure of risk that looks at how quickly the price changes and by how much.

The model was tested against London Stock Exchange data on 11 real stocks collected over 21
months - 6 million buy and sell orders. It predicted 96% of the spread variance and 76% of the
variance in the price diffusion rate. The model also showed that increasing the number of market
orders increased price volatility because there are then fewer limit orders to match up with each other.

Incentives and charges

The observation could be useful in the real financial markets. "If it is considered socially desirable to
lower volatility, this can be done by giving incentives for people who place limit orders, and charging
the people who place market orders," Farmer says.

Some amount of volatility is important, because prices should reflect any new information, but many
observers believe there is more volatility than there should be. "On one day the prices of US stock
dropped 20% on no apparent news," says Farmer. "High volatility makes people jittery and sours the
investment climate." It also creates a high spread, which can make it more expensive to trade in
shares.

The London Stock Exchange already has a charging structure in place that encourages limit orders.
"Limit orders are a good way for smaller investors to trade on the order book," says a spokesperson.

Journal reference: Proceedings of the National Academy of Sciences (DOI:


10.1073/pnas.0409157102)

If you would like to reuse any content from New Scientist, either in print or online, please contact
the syndication department first for permission. New Scientist does not own rights to photos, but
there are a variety of licensing options available for use of articles and graphics we own the copyright

3 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

to.

Have your say

Comment title
Your name
Email
Website
Comment
read all 5 comments
Comments 1 | 2

This comment breached our terms of use and has been removed.

This comment breached our terms of use and has been removed.

Market Orders

Wed Feb 27 16:54:44 GMT 2008 by Olin

Well, this is an interesting article. Volatility is disturbing but is in itself an important market indicator.
If volatility 'sours' the trading experience then maybe that is telling comment on the true market.

I do think that charging for market orders and 'incentivizing' limit orders (as just one example) will
only make an investor considering a market sell place a limit order just below the market price in
order to make a market sale without penalty. That reactonary practice may only increase volatility
rather than reduce it.

The net sum is that trying to direct human behavior with 'carrots and sticks' creates a whole host of
new problems, such as we have here in the USA with tax credits, tax rebates, and various tax
write-offs created to steer spending behavior. The 'river' of augmented behavior merely flows around
obstacles placed in its path and gouges out a new river bottom in a potentially unpredicable path.

reply report this comment


read all 5 comments
Comments 1 | 2

All comments should respect the New Scientist House Rules. If you think a particular comment
breaks these rules then please use the "Report" link in that comment to report it to us.

If you are having a technical problem posting a comment, please contact technical support.

printPRINT
sendSEND

ADVERTISEMENT

4 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Advertising

More

Latest news

Weight scale for atoms could map 'island of stability'

21:15 10 February 2010

The mass of an atom heavier than uranium has been measured for the first time, a feat that could point
the way to a long-sought 'island' of stable, super-heavy elements

Iran's uranium a step away from weapon grade

13:21 10 February 2010

Government's decision to make its own 20-per-cent-enriched uranium would send it almost all the
way to being able to weaponise the stuff

Australia's rain may have moved to Antarctica

12:47 10 February 2010

A new attempt to explain the 40-year drought that has crippled Western Australia says it may be
linked to heavy snowfall over Antarctica

New black hole simulator uses real star data

19:51 09 February 2010

A new interactive program that uses data from more than 100,000 stars reveals the spectacular light
show you'd see if you wandered close to a black hole

see all related stories

More

Latest news

Act early in life to close health gaps across society

00:01 11 February 2010

Better parenting and pre-school preparation for education may be the best way to make society
healthier and fairer, says a UK government review

5 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Weight scale for atoms could map 'island of stability'

21:15 10 February 2010

The mass of an atom heavier than uranium has been measured for the first time, a feat that could point
the way to a long-sought 'island' of stable, super-heavy elements

Infection insight raises hopes of better anti-HIV gels

19:00 10 February 2010

It looks like the RNA version of the virus is what gets passed on via semen

Resurrection: ancient humans 'rise from dead'

18:20 10 February 2010

A man who lived 4400 years ago has become the first ancient human to have his genome sequenced –
Egyptian and South American mummies could be next

see all latest news

Most read

Most commented

The strangest liquid: Why water is so weird

Our world may be a giant hologram

Unplugged: Goodbye cables, hello energy beamsMovie Camera

Home test for sperm count could leave men in a mess

The comedy circuit: When your brain gets the joke

Most read

Most commented

What the LHC could find at half-power

Smoking may pose 'third-hand' cancer hazard

Lost leviathans: Hunting the world's missing whales

6 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Our world may be a giant hologram

Unplugged: Goodbye cables, hello energy beamsMovie Camera

TWITTER

New Scientist is on Twitter

Get the latest from New Scientist: sign up to our Twitter feed

This week's issue

Subscribe

Cover of latest issue of New Scientist magazine

For exclusive news and expert analysis every week subscribe to New Scientist print Edition

How to access all online content


Current issue content
Content of past issues
Try our digital magazine sampler

13 February 2010

For exclusive news and expert analysis every week subscribe to New Scientist print Edition

How to access all online content


Current issue content
Content of past issues
Try our digital magazine sampler

ADVERTISEMENT

Advertising
Advertising

Partners

We are partnered with Approved Index. Visit the site to get free quotes from website designers and a
range of web, IT and marketing services in the UK.

Back to top

Login

7 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Username
Password
Remember me

Your login is case sensitive

Forgotten your password?


Subscriber? Register now!

Subscribe now
Institutional Subscribers
Athens login

close

About us

New Scientist
Syndication
Recruitment Advertising
Staff at New Scientist
Advertise
RBI Jobs

User Help

Contact Us
FAQ / Help
Disclaimer
Ts & Cs
Cookies
Privacy Policy

Subscriptions

Subscribe
Renew
Gift subscription
My account
Back issues
Customer Service

Links

Site Map
Browse all articles

8 of 9 10-02-22 2:12 AM
'Zero intelligence' trading closely mimics stock market - physic... http://74.125.47.132/search?q=cache:CFbcDntXyBsJ:www.new...

Magazine archive
NewScientistJobs
The LastWord
E-Newsletter
RSS Feeds
Online Store

© Copyright Reed Business Information Ltd.


Advertising
Quantcast

9 of 9 10-02-22 2:12 AM