Systemic Failures and Organizational Risk Management in Algorithmic Trading: Normal Accidents and High Reliability in Financial Markets

Bo Hee Min*, Christian Borch

*Corresponding author for this work

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Abstract

This article examines algorithmic trading and some key failures and risks associated with it, including so-called algorithmic ‘flash crashes’. Drawing on documentary sources, 189 interviews with market participants, and fieldwork conducted at an algorithmic trading firm, we argue that automated markets are characterized by tight coupling and complex interactions, which render them prone to large-scale technological accidents, according to Perrow’s normal accident theory. We suggest that the implementation of ideas from research into high-reliability organizations offers a way for trading firms to curb some of the technological risk associated with algorithmic trading. Paradoxically, however, certain systemic conditions in markets can allow individual firms’ high-reliability practices to exacerbate market instability, rather than reduce it. We therefore conclude that in order to make automated markets more stable (and curb the impact of failures), it is important to both widely implement reliability-enhancing practices in trading firms and address the systemic risks that follow from the tight coupling and complex interactions of markets.
Original languageEnglish
JournalSocial Studies of Science
Number of pages26
ISSN0306-3127
DOIs
Publication statusPublished - 6 Oct 2021

Bibliographical note

Epub ahead of print. Published online: 6 Oct 2021.

Keywords

  • Algorithmic trading
  • Financial regulation
  • Flash crash
  • High-reliability organizations
  • Normal accidents theory
  • Risk

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