The global financial markets: An ultra-large-scale systems perspective

Abstract

We argue here that, in recent years, the world's financial markets have become a globally interconnected complex adaptive ultra-large-scale socio-technical system-of-systems, and that this has important consequences for how the financial markets should be engineered and managed in future. Major failures in the financial markets can now occur at super-human speeds, as was witnessed in the "Flash Crash" of May 6 th 2010. Events such as the Flash Crash may become more commonplace in future, unless lessons are learned from other fields where complex adaptive socio-technical systems-of-systems have to be engineered for high-integrity, safety-critical applications. In this document we review the literature on failures in risky technology and high-integrity approaches to safety-critical SoS engineering. We conclude with an argument that, in the specific case of the global financial markets, there is an urgent need to develop major national strategic modeling and predictive simulation capabilities, comparable to national-scale meteorological monitoring and modeling capabilities. The intent here is not to predict the price-movements of particular financial instruments or asset classes, but rather to provide test-rigs for principled evaluation of systemic risk, estimating probability density functions over spaces of possible outcomes, and thereby identifying potentially high-consequence failure modes in the simulations, before they occur in real life, by which time it is typically too late. © 2012 Springer-Verlag.