American Consequences - June 2019

In light of these alarms, market

provide a limited amount of information about the market, by observing the behavior of a subset of appropriately chosen stocks. Our approach was to include all the stocks in the market. In contrast, our model gives this information for almost the whole range of stocks, broken down by specific price ranges. All of these ranges can be simultaneously observed, generating an early warning. We found analogues for the measurements that scientists typically use to understand flow. For example, for our model, the “density” of the flow was the number of stocks per unit price, and “pressure” was the upward or downward force on the price caused by the buying and selling activity of traders.

Observing stock markets from a computer screen, we could see that the movement of stock prices resembles the flow of a fluid like air or water. EXAMINING THE FLASH CRASH In our study, published on September 1, 2018, we obtained price-per-minute data for about 4,000 stocks in the NYSE, Nasdaq and AMEX on the day of the May 2010 flash crash. We used these data to test our fluid dynamics model of the market. When we looked at the prices of 700 stocks on the afternoon of the crash, we saw that the shock was clearly visible. The velocity

regulators might then take the appropriate action... investors could exploit the crash to improve their positions... help dampen

some of the

crash’s effects.

These graphs show the velocity of all stock prices before, during and after the May 2010 flash crash. Romesh Saigal and Abdullah AlShelahi, CC BY-SA


June 2019

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